Only for 第1号被保険者
**I made a mistake in this post. I am going to leave the post as originally written, and explain the mistake and how it changes things at the bottom. I apologize for the sloppy writing -I should have done a bit more research.**
This post is only for people enrolled in the first level of the national pension scheme (第1号被保険者). This includes self-employed and freelancers, as well as people whose company does not help pay their pension. Workers enrolled in the second level (kosei nenkin) or their dependent spouses (who don’t pay into the pension scheme) are not eligible, and neither are people who don’t pay nenkin or pay a discounted rate.
Last month my wife received a letter from the nenkin administration encouraging her to enroll in a supplementary scheme to increase her eventual pension.
At first I dismissed the idea, then after a couple of days thought about it a bit more. We eventually decided to join the scheme.
Before making the decision, I found out there are actually two ways to overpay the national pension scheme. We’ll talk about both of them in this post, and I’ll explain why we chose the one we ended up going with (you can’t join both).
First though, why would you want to pay extra money into the national pension scheme? By many accounts, the finances are in trouble and there is a chance people won’t receive the pensions they were promised. A lot of people refuse to pay in at all, let alone pay more than they have to.
The maximum benefit for kokumin nenkin (after paying in for 40 years) is currently about 65,000 yen a month.
Well, there are three good reasons I can think of. First, the national pension is backed by the government, and therefore is unlikely to go completely bust. Second, it will be paid as long as you live, so there is no chance of it running out in the future if you live too long. And third, paying into the national pension reduces your taxable income.
The two overpayment schemes have the same requirements and benefits, but are quite different in practice.
付加年金 (fuka nenkin) is very simple. You pay an extra 400 yen a month, and your annual nenkin payment in retirement goes up by 200 yen a year for each month you paid. In practice this means that you break even after two years of retirement, not counting the (small) tax savings. It’s a great deal.
国民年金基金 (kokumin nenkin kikin) is less simple. It is modular, and you buy an initial module that is a pension, then additional modules that provide you with pension or guaranteed payments for a limited period. You can choose how much to pay, up to 68,000 yen a month (all of which reduces your taxable income). The website explains everything and also has a calculator, but you may want to seek advice from the nenkin administration or a professional before making a decision.
In my wife’s case, we decided to pay into the second system, because it would reduce her taxable income more (approximately 64,000 yen a month instead of 400 for the fuka system) and increase her pension more. According to the calculator, by paying in the maximum now (64,000 yen a month) she can increase her pension by about 40,000 yen a month.
Arguably, we could do better by investing the money. The future of the pension scheme in Japan is slightly uncertain. It will probably see changes in our lifetimes. It could be reduced, or changed. It could become means-tested. We just don’t know.
However, I think that a monthly payment from the government has a greater value than the same amount from investments. Especially as we get older, a monthly cheque is simpler and less risky. I also doubt that the government will risk angering the elderly by breaking the pension promise to a great extent.
The tax savings are also significant for us, as we are trying to keep my wife’s taxable income as low as possible while still saving as much as possible for the future. By maxing out iDeCo (68,000 yen a month), the Small-Medium Business Association retirement plan (70,000 yen a month) and the pension kikin (68,000 yen a month) she can reduce her income by over 200,000 yen a month, which also reduces local inhabitant taxes and health insurance payments (including long-term care payments, etc.).
Basically I think everyone should consider joining the fuka nenkin system, and people with higher incomes, who are already maxing out iDeCo, NISA, etc., or are paying a lot of income tax may want to consider the kikin nenkin system instead.
What do you think? Have you joined either of these schemes? Are we crazy for even considering it?
**So the mistake I made was that I overlooked the fact that iDeCo and nenkin kikin use the same tax allowance, and it is capped at 68,000 yen a month.
As my wife is already maxing out iDeCo, joining the nenkin kikin scheme is not going to reduce her taxable income any further.
Personally I think iDeCo is a better option than nenkin kikin, mainly due to political risk in the future (the chance that the government will change the nenkin system). iDeCo accounts belong to the individual unlike the general nenkin fund. Nenkin kikin may be an option for US citizens who want the tax deduction but can’t buy mutual funds in an iDeCo account.
As we can’t use nenkin kikin, I’ll look into the fuka nenkin option instead.**
When I opened my Ideco account, I think there was a question about 国民年金基金 (kokumin nenkin kikin). Which make me wonder if you have to choose between an ideco contribution and a Kokumin nankin kakin contribution. Just out of interest have you asked an accountant or the tax office, if you can get a tax break if you max out all three?
I just looked into this, and you are right. Dammit!
The iDeCo and the nenkin kikin use the same allowance. I should have noticed, as they are both that weird 68,000 yen a month.
The business saving plan is stackable with iDeCo, but it won’t be possible to do both full iDeCo and nenkin kikin.
Personally I think iDeCo is better than the nenkin kikin, mainly because of political risk. Others may reach a different conclusion based on their circumstances.
Now I have to rewrite the blog post…
Well done for spotting this though! Appreciate the help 🙂
Are you still eligible to put extra money into fuka nenkin and/or nenkin kikin if you already participate in another pension scheme? For example, university teachers have the 私学共済 system, which complements, is already in addition to, the 国民年金 system.
No, it’s only for 第1号被保険者, people that pay into kokumin nenkin themselves. The private kyosai is treated the same as kosei nenkin.
Thanks for the clarification. My husband paid his (and my) pension through his company. But when he retired, I had to pay on my own. I was given the option of paying a bit more per month for a larger payout, and we decided it was worth it. Now that he has a new job, we are back to paying through the company.
But this is something I have been thinking about for our daughter, who is at university right now. You are supposed to start paying for the pension when you become 20. She told the pension office she was in university, so she doesn’t have to pay until she graduates. The time is counted, but the amount she will eventually receive is reduced by having several years of no payments. I also see making the payments as being a way to transfer a bit of income to her. I think this may be especially helpful now that you only need 10 years of input to get something back. Is this a valid way to think about her pension?
Hi Catherine
That is a tough question, because so many variables are unknown. We don’t know what the pension scheme will look like in 50 years time (when your daughter will probably start receiving payments). There is a good chance that future governments will change the way the pension system works.
We may also see something like universal basic income come in, which would replace state pensions.
Of course the good point of paying into the pension for your daughter would be the fact that she won’t have access to her money when she’s young but it will hopefully be there for her when she needs it when she’s older. Another benefit of paying into kokumin nenkin is that she would then be able to open an iDeCo account, which is an excellent way to save for the future.
My personal preference would be to have her open a NISA account (Junior NISA if she is under 20) and help her invest in that. With any luck she will learn about investing and become more able to handle her own finances in the future. Best of all, the money would be hers and not as vulnerable to government adjustments. She would also be able to access the money any time, in order to buy a house for example.
The right answer for your family will depend on 1) your knowledge and attitude towards investing, 2) your daughter’s personality, and 3) what you believe will happen in the future.
Anything you do to get her started with thinking about money and the future will be a positive step though. Good luck and let us know how it goes and if you have more questions!
A small clarification.
>> In practice this means that you break even after two years of retirement
You mean break even on one year’s worth of paying the fuka (400 yen/month)?
No, you break even on the whole amount paid in (not accounting for inflation, which will make a big difference over the long term).
If you pay fuka nenkin for ten years, you’ll pay a total of 48,000 yen. in your first year of kokumin nenkin you’ll get an extra 24,000 yen. In the second year you’ll get an extra 24,000 yen. And in the third year and subsequent years you’ll keep getting the 24,000 yen (and will be ‘making’ money).
It’s a great deal, and I would happily pay up to a quarter of my money for investing into it if someone offered me similar conditions 🙂
What is the the Small-Medium Business Association retirement plan, can you write a more detailed blog when your time permits. My wife started her own company recently here but i am totally unaware of such a plan.
Hi Sri
Several people have asked for that, so a blog post is on the way! I am still doing research though, so it might be a few weeks yet 🙂