Should you take an interim severance settlement?
A home purchase or family medical bill can make early access to a retirement benefit attractive.
The amount available today is only part of the decision: future benefit wages, tax reconciliation and the cost of alternative borrowing can change the comparison.
This calculator helps employees covered by South Korea’s employer severance-pay scheme compare those effects before discussing an application with HR.
Three paths fund the same immediate need
- A — Interim settlement: Receive the benefit accrued so far, then receive a benefit for the remaining service period at retirement.
- B — Keep the benefit and borrow: Preserve the full service period, use a confirmed loan quote, pay monthly interest and repay principal at retirement.
- C — Keep the benefit and use savings: Pay the immediate expense from your own funds and receive the full benefit at retirement.
All paths spend the same funding amount on the settlement boundary date.
A loan draw is paired with its principal repayment, and any additional own funds needed are shown explicitly.
Lifetime net cash is measured after that common expenditure; it is neither total severance pay nor your current bank balance.
This is a Korea-specific estimate with 2026 rules held fixed, not an approval decision or a prediction of future law.
Confirm your retirement benefit scheme first
Employer severance-pay scheme
The model uses the wage-based benefit under Employee Retirement Benefit Security Act Article 8.
It requires at least one year of continuous employment by the settlement date and at least 15 contractual weekly hours averaged over four weeks.
It assumes one continuous employment contract and no previous interim settlement.
DB, DC and IRP
A defined benefit pension, or DB plan, does not permit this interim severance settlement while you remain employed.
A defined contribution pension, or DC plan, permits qualifying withdrawals from an accumulated account balance rather than from this average-wage formula.
Individual retirement pension, or IRP, taxation depends on the source of contributions and returns, so selecting these schemes hides the monetary comparison.
The legal ability to provide a pension entitlement as collateral and a lender’s willingness to issue a loan are separate questions.
Act Article 7 and Enforcement Decree Article 2 specify collateral conditions; they do not create an automatic pension-secured loan for someone using an employer severance-pay scheme.
Some Decree Article 2 cases use a 50% account-balance limit, while qualifying shutdown or disaster cases use a separate ministerial limit.
The calculator does not apply 50% universally or infer credit approval: path B uses the available amount, rate and fee in your actual alternative loan quote.
Statutory reasons and supporting evidence
Meeting a listed reason in Retirement Benefit Enforcement Decree Article 3 and obtaining employer acceptance are distinct steps.
Ordinary living expenses or an investment opportunity alone do not establish eligibility.
A provisionally met result reflects your answers; it does not establish the facts, compel payment or replace HR’s document review.
Home purchase and residential lease deposit
The employee must own no home and must be buying a home in their own name or bearing a qualifying residential lease deposit.
The deposit reason is limited to once during employment with the same business.
Confirm home ownership status, the contracting party, residential purpose and payment timing from the relevant documents before checking the boxes.
Medical expenses
The illness or injury of yourself, your spouse or a qualifying dependent must require at least six months of care.
Qualifying medical expenses you bear must exceed 12.5% of your annual total wages.
With KRW 60 million in annual wages, KRW 7.5 million is exactly the boundary and does not satisfy the cost condition; the amount must be greater.
The six-month and family conditions must also be satisfied, and a hospital’s gross quote is not automatically your qualifying out-of-pocket expense.
Court decisions, wages and working hours
A bankruptcy declaration or personal rehabilitation commencement must fall within five years counted backward from the application date.
Enter the court’s decision date, not the date you first applied to the court.
A wage-peak scheme must include retirement age extension or a guarantee and the applicable collective agreement or employment rules.
For an agreed hours reduction, contractual hours must fall by at least one hour per day or five hours per week, with at least three months of agreed continued work under the reduced schedule.
Reasons requiring further review
A benefit reduction caused by working-hour changes under Act 15513 and disaster damage covered by a ministerial notice require additional legal and factual review.
Selecting either reason produces a review status, not automatic approval.
You can inspect a hypothetical A scenario while a condition is unmet, but the interface keeps that limitation visible.
How to enter dates and benefit wages
- Employment start: Enter the beginning of the continuous employment contract.
Prior settlements or excluded service periods require a different calculation and should first be checked with HR.
- Settlement boundary: The settlement covers service through the day before this date; new service begins on this date.
Payment is assumed on the boundary date, so a later actual payment changes present value.
- Retirement date: Enter the first day you are no longer employed, after your last working day.
Service includes the start date and excludes the end date, using actual calendar days.
Leap days affect gross benefits, but tax service years are not calculated by blindly rounding days divided by 365 upward.
- Application date: This separate date controls the five-year lookback for a bankruptcy or rehabilitation decision.
Application and settlement must be from 2026 onward, and the remaining retirement horizon cannot exceed 50 years.
- Current and future daily benefit wages: Average wages generally use the preceding three months’ wage total divided by the calendar days in that period.
Labor Standards Act Article 2 requires the ordinary-wage floor when the calculated average is lower.
Ask HR to verify bonuses, allowances and excluded periods rather than treating monthly salary as the same thing as a daily average wage.
Gross benefit formulas before and after settlement
Actual service days determine gross benefits
- Interim gross benefit = current daily benefit wage × 30 × pre-settlement service days ÷ 365
- Remaining gross benefit = future daily benefit wage × 30 × post-settlement service days ÷ 365
- Retained gross benefit = future daily benefit wage × 30 × all service days ÷ 365
Each gross benefit estimate discards fractions of one won.
If wages rise, early settlement fixes the earlier service period at a lower wage and can reduce total gross benefits.
If wages fall, as in a qualifying wage-peak arrangement, fixing the earlier period at a higher wage can increase the total.
The period reset concerns subsequent severance calculation; it does not erase every employment right or all service used for combined tax reconciliation.
When total continuous employment already exceeds one year, a remaining post-settlement period shorter than one year still receives a proportional benefit.
The model does not set that remaining benefit to zero merely because only a few months or one day remains.
More favorable employer payout multiples and special retirement awards are outside the formula.
Korean retirement-income tax under 2026 rules
A remaining fraction of a tax service year counts as a full year.
Service from January 1, 2020 through the day before January 1, 2021 is one tax year even though it contains 366 days.
Combined settlement uses the entire continuous contract period once, without adding overlapping periods.
Service-year deductions under Income Tax Act Article 48| Tax service years y | Deduction, KRW |
|---|
| Up to 5 | 1,000,000 × y |
| Over 5, up to 10 | 5,000,000 + 2,000,000 × (y − 5) |
| Over 10, up to 20 | 15,000,000 + 2,500,000 × (y − 10) |
| Over 20 | 40,000,000 + 3,000,000 × (y − 20) |
Converted salary and the tax calculation
The service deduction is capped at the relevant retirement income.
Converted salary = (retirement income − service deduction) ÷ service years × 12.
Subtract the converted-salary deduction below, apply the progressive income tax schedule, divide by 12 and multiply by service years.
- Up to KRW 8 million: deduct the entire converted salary
- Over KRW 8 million through KRW 70 million: KRW 8 million plus 60% of the excess over KRW 8 million
- Over KRW 70 million through KRW 100 million: KRW 45.2 million plus 55% of the excess over KRW 70 million
- Over KRW 100 million through KRW 300 million: KRW 61.7 million plus 45% of the excess over KRW 100 million
- Over KRW 300 million: KRW 151.7 million plus 35% of the excess over KRW 300 million
Taxable-base boundaries are KRW 14 million, 50 million, 88 million, 150 million, 300 million, 500 million and 1 billion.
Their successive marginal rates are 6%, 15%, 24%, 35%, 38%, 40%, 42% and 45%, with the corresponding progressive deductions.
The highest applicable rate is not applied directly to the whole severance payment.
Local income tax adds 10% of national retirement-income tax; estimated won-level rounding can differ from an official payment notice.
Tax check: KRW 100 million and 20 service years
The service deduction is KRW 40 million and converted salary is KRW 36 million.
The converted-salary deduction is KRW 24.8 million, leaving a taxable base of KRW 11.2 million.
National tax is KRW 1,120,000 and local tax is KRW 112,000, for total tax of KRW 1,232,000.
This illustrates why a normal salary tax percentage should not be applied directly to the retirement benefit.
Why combined tax settlement matters
Income Tax Act Article 148 and Income Tax Enforcement Decree Article 203 provide for reconciling qualifying previously paid and newly payable retirement income.
The procedure involves prior withholding receipts and confirmation of the relevant contract with the same employer.
Therefore, an interim settlement does not necessarily cause permanent loss of all tax service-year deductions.
Combined settlement assumption
Calculate tax on both gross benefits using the full service period, then subtract tax already paid at interim settlement.
A negative final tax is retained as a refund of cash tax previously paid.
This model assumes no deferred retirement income, so its refund result must not be applied unchanged to an account with deferred tax.
Separate taxation assumption
Calculate tax on each payment using its own service period and add the two taxes.
Clearing the combined-settlement checkbox switches the cash-flow model to this assumption while the tax comparison remains visible.
Combining is not assumed to save tax in every case: a negative tax reduction means the combined estimate is higher.
Worked example: lifetime cash and present value
The fictional default starts employment on 2016-09-07, settles on 2026-09-07 and retires on 2031-09-07.
Current daily benefit wages are KRW 150,000 and future wages KRW 180,000; funding need and loan limit are each KRW 30 million.
Loan interest is 5%, the annual discount rate is 3%, the upfront fee is zero and combined settlement is assumed.
These inputs do not establish employer acceptance, lender approval or a forecast of future wages.
Fictional example after spending the same immediate funding amount| Path | Lifetime net cash, KRW | Present value, KRW |
|---|
| A — Interim settlement | 41,127,611 | 37,454,706 |
| B — Keep and borrow | 42,390,702 | 36,069,175 |
| C — Keep and use savings | 49,894,812 | 38,912,386 |
A receives a gross interim benefit of KRW 45,024,657, but its total gross benefit is KRW 9,004,932 below the retained-benefit path because wages rise.
Separate taxation totals KRW 1,272,125 and combined tax totals KRW 911,840, a reduction of KRW 360,285 in this example.
B pays approximately KRW 7,504,110 of actual-day interest and repays the KRW 30 million principal at maturity.
C has the highest displayed value here, but requires KRW 30 million of own funds today; a person without those funds cannot execute C as shown.
Loan interest, discounting and the break-even rate
Match the timing of every cash flow
Present value sums each cash flow divided by (1 + annual discount rate) raised to its elapsed years.
Elapsed years are actual days from the settlement boundary divided by 365.
Interim proceeds, loan draw and upfront fees occur immediately; interest is paid on monthly anniversaries and any final partial month is paid at retirement.
Each interest payment = principal × annual loan rate × actual days in that payment period ÷ 365, with no principal reduction before retirement.
Nominal lifetime cash for B equals retained after-tax benefits minus the funding expenditure, total interest and fees.
Loan draw and principal repayment cancel in the undiscounted total, but both remain in present value because they occur at different dates.
Omitting repayment would incorrectly make borrowing appear to create income.
The break-even loan rate makes A and B equal in present value and is approximately 4.01% in the default example.
With other inputs fixed, increasing the loan rate reduces B’s present value.
No threshold is calculated when no loan is drawn; a negative calculated threshold is reported as no crossover at a nonnegative rate.
This is not a quoted market rate or a guaranteed return, and the answer changes when future wages, discount rate, term or fees change.
Compare conservative, central and optimistic assumptions before discussing the actual funding decision.
Practical uses and limits
- Home completion payment: Check whether net interim proceeds cover the amount due.
A mismatch between the property payment deadline and actual settlement payment creates a cash gap even if the amounts match.
- Approaching a wage-peak scheme: Compare falling future wages with an unchanged-wage scenario.
Confirm the retirement age and employment-rule conditions; a wage reduction alone does not automatically establish the statutory reason.
- Medical expenses: Verify qualifying out-of-pocket expenses, annual wages, care duration and the family relationship together.
Check any additional own funds still required after receiving interim proceeds.
- Changing loan terms: The model holds the entered rate fixed and repays principal in a lump sum at retirement.
Floating rates, amortizing loans, early repayment fees and failure to renew a loan require separate contract-based calculations.
- Future retirement and tax: A future date such as 2031 still uses the 2026 rule set.
The model does not predict amendments, special employer awards, executive limits, tax-exempt income, pension-payment tax reductions or IRP tax deferral.
Frequently asked questions
Does interim settlement always increase tax?
No.
Amounts, service periods, wage changes and combined settlement all matter.
Check the receipt requirements under Income Tax Act Article 148 and the reconciliation conditions under Decree Article 203, then compare the estimates.
Must the employer pay when a statutory reason is met?
A provisionally met result only checks the facts you entered.
Act Article 8 permits an employer to make a qualifying interim settlement upon an employee’s request, so acceptance and evidence must be confirmed separately.
Is there no remaining benefit if I retire within a year?
If total continuous employment is already at least one year, the remaining period after settlement is calculated proportionally even when it is shorter than one year.
Do not restart the entire eligibility test using only that remaining period.
Do medical costs equal to 12.5% of annual wages qualify?
Exactly 12.5% does not satisfy the cost condition.
The law requires an amount exceeding the threshold, together with at least six months of care and the qualifying family relationship.
If C is highest, should I always avoid settlement?
C assumes you can fund the immediate expense from savings.
Check payment deadlines and living-cost reserves; the numerical ranking is not a finding about approval or the right financial decision for your circumstances.
Why can final tax or lifetime cash be negative?
Negative final tax represents a refund when combined tax is below tax already paid in cash.
Negative lifetime net cash means the common expenditure, interest and fees exceed after-tax retirement benefits; it does not mean gross severance pay itself is negative.
Why is a pension-secured loan not calculated automatically?
Employer severance pay and pension accounts are different systems, and legal collateral conditions differ from actual lender availability.
This model compares a confirmed alternative loan quote and does not determine DB, DC or IRP withdrawal rights or credit approval.
Official sources and verification date
Current statutes were checked directly through the Korean National Law Information OPEN API on September 7, 2026.
The Retirement Benefit Security Act version took effect July 1, 2026; its Decree version took effect March 24, 2026; Labor Standards Act Article 2 uses the August 20, 2026 version.
The Income Tax Act and Local Tax Act current versions are dated July 1, 2026, while the cited Articles 48, 55, 148 and 103-13 have article-level effect from January 1, 2026.
Income Tax Enforcement Decree Article 203 uses the July 1, 2026 version.
Save the comparison for an HR discussion
Enter actual dates, HR-confirmed benefit wages and lender quotes, then save the review report from the calculator.
Discuss the statutory evidence, payment date, prior withholding receipt, combined settlement procedure, additional own funds and principal repayment plan together.
Keeping those documents beside the comparison makes the application decision more concrete.