As life expectancy in Japan grew, so did concerns about the pension payouts after retirement. Estimates suggest that people in Japan will spend 20-30 years relying on the pension payouts after their retirement (currently retirement age is set at 65). The demographic shift has put a lot of pressure on the nenkin pension system. As the recent report has shown, it will require re-adjustments to provide sustainable living after retirement for a model household.
Thus, people are looking for ways to finance their post-retirement lives in other ways, and self-managed pension funds like iDeCo might be the answer. However, there are many things to consider: eligibility, investment options, income level, amounts of payments to the fund, and their effect on the income tax.
In this article, we are going to examine how iDeCo fund works and how can citizens and long-term residents of Japan, including dependent spouses, benefit from the self-managed pension funds.
What is iDeCo and how it works?
iDeCo stands for individual defined contribution. In short, it is a way to save money for retirements and than get them as additional payments to your pension once you reach the appropriate age or status.
iDeCo allows people to create an account and make regular payments. The contribution sum starts at JPY 5,000 per month and can be modified by an increment of JPY 1,000. However, depending on the type of one’s employment there is a maximum cap for monthly payment. You can check your limits on the iDeCo official page in English.
Dependent spouses can contribute up to JPY 23,000 per month to get pension payouts later on to their own name.
These payments then used for the chosen type of investment product: term deposits, insurance products, investment trusts. Depending on the chosen plan and type of investment, the payout sums may vary. However, one can choose how much money goes to each type of investment option from every payment to make sure that payouts do not fall below the principal.
The accumulated sum will be paid to contributors as a lump sum or as a regular income when they retire from the working life. Moreover, being a part of iDeCo means you can get tax breaks.
It is possible to start contributing to iDeCo at any age before 60. However, the sooner you begin, the higher the likelihood of accumulating bigger sums and getting them as pension payouts when one reaches 60 years of age. Starting payments after 50 might mean that in some cases you will not be able to get your payouts before 65 years of age.
Who is eligible for iDeCo?
There are three groups of individuals who are eligible for the plan:
- People between 20 and 59 years of age who are self-employed, students, etc.
- People under 60 years of age who are enrolled in the employee pension plans, e.g. company employees or public servants.
- Dependent spouses between 20 and 59 years of age married to people who are a part of the employee pension fund.
Being part of iDeCo might be interesting to the last category as it allows to save on income taxes. Before we examine how it works, let us define who can be considered a dependent spouse?
Who is a dependent spouse?
Generally speaking, anyone who makes between JPY 1.03 million and JPY 1.06 million per year is a dependent spouse. The bar of income can go up to JPY 1.3 million. However, in such a case, there are some other criteria to keep in mind. If a person makes between JPY 1.06 million and JPY 1.3 million but wants to keep the status of a dependent spouse, they should not be full-time students and must comply with the following requirements:
- They cannot work over 20 hours a week.
- Their monthly salary should stay below JPY 88,000 per month.
- Their continuous work experience should not be longer than a year.
- If they work for the company, it should have less than 501 employees.
How can dependent spouses benefit from iDeCo?
Firstly, dependent spouses with the yearly income lower then JPY 1.03 million do not pay income taxes. Thus, if a dependent spouse gets an income of a little over JPY 1.03 million and is at risk of losing the status (and the associated tax breaks), enrolling in the iDeCo can help to push the income bar lower and keep the status and the income tax savings. The minimum contribution sum is JPY 5,00 and the maximum cap of contributions for dependent souses is JPY 23,000 per month, providing an opportunity to flexibly influence once income numbers.
However, this approach is unavailable for those who earn over JPY 1.3 million per year, since one’s income is calculated before payments to iDeCo.
Secondly, investing through iDeCo is tax-free as well as getting the payouts afterward. So contributing to the system saves a lot of payments in a long-term perspective. Finally, it is a good way for dependent spouses to have pension savings in their own name.
"Otsumami" - a bite size snack:
iDeCo is a great way to save extra money for retirement and benefit from tax breaks.