Company allowing switch from DC Plan matching to iDeco

[TokyoBoglehead]

I wish I could get out of my company DB plan!
I pay in 10,000 yen every month and my company contributes a further 500 yen! How generous!
I joined before I knew anything about iDeCo. My iDeCo limit is now 12,000 yen per month as opposed to 23,000 if I were not paying into the DB scheme.
The DB scheme is also really risk averse, so I am looking at a growth rate of about 1% or so.
The only way I can get out of the DB though is by retiring or leaving my company....

But the Tax on the DB scheme will be very very low.

Firstly, if/when they pay you out as a lump sum, you get to deduct the Special Deduction of 400,000 per year for the first 20 years and 700,000 per year for any years over 20 years.

Then you divide what ever is left by 2, and that is then taxable at standard marginal Tax Rates. This is taxed completely stand-alone, and has no effect on, or is not affected by any other income in the same Tax Year. The tax will be very low.

500 yen is a 5% guaranteed monthly return. Pretty sweet deal along with the tax break.

[adamu]

I wish I could get out of my company DB plan!
The DB scheme is also really risk averse, so I am looking at a growth rate of about 1% or so.

But the Tax on the DB scheme will be very very low.

500 yen is a 5% guaranteed monthly return. Pretty sweet deal along with the tax break.

He would still get the tax breaks / company contribution if it was a DC plan that had the option to invest in a diversified index fund that is likely to pay out multiple times that in the long-run, though. The options available in company DB/DC plans seem universally worse than the equivalent iDeCo plans, even when offered by the same provider. Looking at SBI, their iDeCo has eMaxis slim funds, but the cheapest index fund in their company DC plan is an MSCI Kokusai fund for twice the cost of eMaxis Slim. It feels like they're taking advantage of the lack of consumer choice to take easy money from people's pension savings.

[TBS]

I wish I could get out of my company DB plan!
I pay in 10,000 yen every month and my company contributes a further 500 yen! How generous!
I joined before I knew anything about iDeCo. My iDeCo limit is now 12,000 yen per month as opposed to 23,000 if I were not paying into the DB scheme.
The DB scheme is also really risk averse, so I am looking at a growth rate of about 1% or so.
The only way I can get out of the DB though is by retiring or leaving my company....

ClearAsMud made some excellent points about DC plans. The situation for DB plans is more nuanced however. For many DB plans there is a cut off point based on years of enrollment, beyond you would not receive a lump sum if you left the scheme. It would pay out the pension annuity in retirement instead.

Assuming your scheme has a cut-off, to value the scheme before the cut-off point, you need to be considering the investment returns & the company contribution (as you are), as this determines the lump sum pay out. After the cut-off you need to be considering the value of the annuity, i.e. how much it would cost you to buy something similar if you were paying cash for it yourself.

500 yen is a 5% guaranteed monthly return. Pretty sweet deal along with the tax break.

Each 10,000 monthly payment is getting a one-off 5% (500 yen) top-off from the company. So a way to think about it is there to 6% growth in the first year (5% bonus + 1% scheme growth), while from the following year that 10,600 yen will only grow at 1%. This will soon be outpaced by an iDeco equities fund, assuming 5% growth, as 10,000 invested will grow to 10,500 in the first year, and continue to grow at 5% in subsequent years.

Remember too that if Roger was paying the 10,000 into iDeco instead, the tax break would be the same.

But the Tax on the DB scheme will be very very low.

Firstly, if/when they pay you out as a lump sum, you get to deduct the Special Deduction of 400,000 per year for the first 20 years and 700,000 per year for any years over 20 years.

Then you divide what ever is left by 2, and that is then taxable at standard marginal Tax Rates. This is taxed completely stand-alone, and has no effect on, or is not affected by any other income in the same Tax Year. The tax will be very low.

I think Tkydon is referring here to the tax treatment if you left the scheme in the lump sum payout phase. One option with lump sum pension payouts is to transfer it directly to your iDeco. In this scenario it will be tax free.

[Tkydon]

I think Tkydon is referring here to the tax treatment if you left the scheme in the lump sum payout phase. One option with lump sum pension payouts is to transfer it directly to your iDeco. In this scenario it will be tax free.

My experience is, they pay out any DB part in cash when you leave.
Any DC Part can be transferred to another DC with your next employer, or iDECO, or if you do nothing, after a period of time the DC Provider will transfer it to Kokumin Nenkin Kikin.
I may be wrong...

[TBS]

I think Tkydon is referring here to the tax treatment if you left the scheme in the lump sum payout phase. One option with lump sum pension payouts is to transfer it directly to your iDeco. In this scenario it will be tax free.

My experience is, they pay out any DB part in cash when you leave.
Any DC Part can be transferred to another DC with your next employer, or iDECO, or if you do nothing, after a period of time the DC Provider will transfer it to Kokumin Nenkin Kikin.
I may be wrong...

There are portability options for DB scheme pay-outs now as well, e.g. to iDeco or to the new company's DB/DC scheme.

So there's lots of moving parts here. I'd recommend for anyone not comfortable with researching the options & running the sums themselves to maybe seek professional financial advice. I don't think it is possible to say for all cases that any single option is the clear winner.

[Roger Van Zant]

I wish I could get out of my company DB plan!
I pay in 10,000 yen every month and my company contributes a further 500 yen! How generous!
I joined before I knew anything about iDeCo. My iDeCo limit is now 12,000 yen per month as opposed to 23,000 if I were not paying into the DB scheme.
The DB scheme is also really risk averse, so I am looking at a growth rate of about 1% or so.
The only way I can get out of the DB though is by retiring or leaving my company....

But the Tax on the DB scheme will be very very low.

Firstly, if/when they pay you out as a lump sum, you get to deduct the Special Deduction of 400,000 per year for the first 20 years and 700,000 per year for any years over 20 years.

Then you divide what ever is left by 2, and that is then taxable at standard marginal Tax Rates. This is taxed completely stand-alone, and has no effect on, or is not affected by any other income in the same Tax Year. The tax will be very low.

500 yen is a 5% guaranteed monthly return. Pretty sweet deal along with the tax break.

I would much rather get out of the DB scheme and pay an extra 11,000 yen into my iDeCo each month. Over the next twenty years or so, I know which one will grow more! The DB is so risk averse, it is frankly ridiculous.

[Roger Van Zant]

I wish I could get out of my company DB plan!
I pay in 10,000 yen every month and my company contributes a further 500 yen! How generous!
I joined before I knew anything about iDeCo. My iDeCo limit is now 12,000 yen per month as opposed to 23,000 if I were not paying into the DB scheme.
The DB scheme is also really risk averse, so I am looking at a growth rate of about 1% or so.
The only way I can get out of the DB though is by retiring or leaving my company....

But the Tax on the DB scheme will be very very low.

Firstly, if/when they pay you out as a lump sum, you get to deduct the Special Deduction of 400,000 per year for the first 20 years and 700,000 per year for any years over 20 years.

Then you divide what ever is left by 2, and that is then taxable at standard marginal Tax Rates. This is taxed completely stand-alone, and has no effect on, or is not affected by any other income in the same Tax Year. The tax will be very low.

Thanks for your comments.
The main reason that the "tax will be very low" though is that the final investment sum will be pretty paltry! Based on an interest rate of 1.5%, I am only looking at about 2.7 million yen after paying in 10,000 per month for twenty years!

[TBS]

The main reason that the "tax will be very low" though is that the final investment sum will be pretty paltry! Based on an interest rate of 1.5%, I am only looking at about 2.7 million yen after paying in 10,000 per month for twenty years!

Isn't this only part of the picture though? Do you know how much the annuity would be upon reaching your company's statutory retirement age? Is it an annuity until death or for a fixed number of years?

[Tkydon]

2.7M - 20x400000 = 2.7M - 8M = Less than Zero = No Tax...

[TBS]

2.7M - 20x400000 = 2.7M - 8M = Less than Zero = No Tax...

Sorry, it wasn't a question about the tax. To know whether the returns are good or not in retirement (if Roger stays with the company until retirement), we need to be looking at the actual value of the DB pension annuity.

Also another thing to highlight in the event of quitting early, is the retirement payment tax free allowance is shared between the pension payout 脱退一時金 and taishokukin 退職金, if any is received. It sounds like from the sums involved in Roger's case that the limit may not be breached, but for others this may be a consideration.