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Pensions for Expats in Japan

Submitted: March 2014

The Japanese pension system is essentially contribution-based, rather than tax-financed. This is in no way surprising given Japan’s corporatist tradition. Retirement pensions are one of the five pillars of Japan’s social security system, the remaining four being health, long-term care, unemployment, and work-related accidents.

The system comprises of social insurance schemes and private schemes, the most notable social insurance schemes being National Pension and Employees’ Pension Insurance (EPI). As far as private pensions are concerned, there are tax-efficient products – mainly occupational schemes, whereby contributions are tax-deductible. Capital growth therein is taxed on a deemed basis, which may sometimes be inefficient from a tax point of view.

It is generally possible to reclaim your accrued pension benefits once you depart from Japan, but only if you are not a Japanese citizen.

 

National Pension

Introduction

National Pension is Japan’s core socialized old-age insurance scheme. All registered residents of Japan aged 20 or over but under 60 must sign up for National Pension, unless they are Category II or Category III individuals. Category II individuals refers to individuals who are already enrolled in the Employees’ Pension Insurance System (see below) while Category III individuals refers to their spouses.

In effect, National Pension is the system that guarantees a safety net for all non-employees, i.e. the self-employed, students, etc.

Contributions

National Pension contributions are on a flat-rate basis. In 2012, the monthly rate was ¥14,980 per month. If you are on a low income, you may claim:

  • a full exemption
  • a three quarters exemption
  • a half exemption, or
  • a quarter exemption.

Exemptions do not kick in automatically, and you will need to apply for it at your municipal office every year.

Benefits

The maximum amount of National Pension you can claim is ¥786,500 per year, and it assumes you have paid the required minimum 40 years of contributions. These 40 years must be “fully-contributed” as well, i.e. you must not have benefitted from a contribution exemption. If you have been granted rebates however, the impact will not be like-for-like for the months during which you did not make full contributions. The contribution-relieved months are in fact treated as follows:

Rebate for the relevant month

The month counts as

Full exemption

1/3

¾ exemption

1/2

½ exemption

2/3

¼ exemption

5/6

In that respect, there is a redistributive effect in your favour if you have been on a low income.

The standard pension age under National Pension is 65, but you may choose to claim your pension at a different age. If you claim it, for example, at 60, you will get only 70% of the amount you are entitled to. If you wait until 70, however, you will get 142%.

Additional Pension Plan

You may decide to contribute an additional ¥400 per month throughout your working life. If you do, you will get an additional payment upon retirement, subject to the early/delayed retirement adjustments. This yearly additional payment is ¥200 multiplied by your number of contribution months, which can be fairly advantageous.

Additional pension payments cannot be drawn as a lump sum.

 

Employees’ Pension Insurance

Unlike National Pension, which is both universal and on a flat-rate basis, EPI is earnings-related. Accordingly, contributions are income-tested.

EPI coverage is mandatory for all full-time employees aged below 70 who work for a business with at least 5 employees. Voluntary enrolment is permitted.

The contribution rate is currently over 16%, and it is scheduled to rise gradually until 2017.

Lump sum withdrawal

Provided you are a foreign national, you may reclaim your EPI benefits as a lump sum after leaving Japan. However, you will have to:

  • do so within two years of departure from Japan
  • have made at least 6 months of contributions in Japan, and
  • be ineligible for pension benefits.

More information can be found from the Japan Pension Service application form.

 

International matters

Social security agreements

Japan has concluded 14 social security agreements so far, including:  Australia, Belgium, Brazil, Canada, Czech Republic, France, Germany, Ireland, the Netherlands, South Korea, Spain, Switzerland, the UK, and the US. A 15th agreement with Italy is being negotiated.

These agreements typically provide for elimination of double social security coverage, and they may include a non-discrimination rule that may “totalise” your contribution periods in each country into one single pool, which is then taken into account by each contracting state to calculate your pension payouts. It should be noted, however, that totalisation does not apply in the treaties with Italy, South Korea, and the UK.

You might wish to check how your applicable social security agreement protects you from discrimination.

International superannuation planning

Many jurisdictions, Japan included, offer private tax-efficient pension plans. Therefore, they are heavily regulated in order to avoid any undue tax base erosion. However, tax neutrality should not be taken for granted in cross-border situations, and there are double taxation risks. Thus, you should check:

  • how your foreign pension payouts are taxed whilst you are in Japan, and
  • how your Japanese superannuation will be taxed by your future country of residence.

If you made your overseas pension contributions out of your after-tax income, you are likely to be better off drawing on your foreign pension before taking up residence in Japan. This may be subject to restrictions in your home country, however.

Cross-border superannuation planning is always on a case-by-case basis. It is strongly recommended to seek specialist advice regarding this matter.

 

Taxation

Receipt of lump sums by residents

If you receive your retirement benefits as a lump sum whilst you are in Japan, they will be taxed separately under special rules. You are first entitled to claim a deduction which increases as you work for longer.

Years of service

Deduction (¥)

Minimum deduction

20 years and below

400,000 × service years

800,000

Over 20 years

8,000,000 + (700,000 × service years over the twentieth)

N/A

Your taxable income (on which the progressive rates apply) is then computed as follows: Taxable income = (Lump sum received – Deduction) * 0.5

Withdrawal of Japanese pension benefits by non-residents (non-Japanese citizens only)

If you are leaving Japan, you can file an application with the Japan Pension Service for a withdrawal of your pension benefits as a lump sum. If you do, a 20.42% withholding tax will be deducted at source.

This withholding tax may partly be reclaimed if you file a tax return with the National Tax Agency. Pursuant to Article 171 of the Income Tax Law, you may elect to have your lump sum taxed on the same basis as residents, i.e. using the calculation method above. Appointing a Tax Agent will be necessary for Japanese tax compliance after you leave Japan.

 

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