Pension payments may be overstated

There is a possibility that personal pension payments could be smaller than what insurance companies estimated when they start to get the pension money after 20 years. If annual interest rates drop to the 6% to 7% level at a point when retirees receive their pensions, their annuity could be half what insurance companies promised.

The Financial Supervisory Service reported that the money paid by policyholders of personal pension insurance, which was introduced in 1994, totaled 17 trillion won as of the end of July. It is so popular that life insurance companies attracted 1.75 million in contracts, and non-life insurance companies clinched 1.71 million contracts.

Annually, an average of 400,000 people purchase the pension insurance. However, it is confusing policyholders because insurance companies included dividends that are not guaranteed in the total amount of pension money.

Nearly 90% of domestic pension insurance products are based on estimated interest rates, the rate applied in operation of insurance premiums, for calculation of basic pension amount at the time of contract. In this case, payment of basic annuity is guaranteed, and the current estimated interest rate is 6.5%.

The problem is that insurance companies has inflated the estimated amount of pension by including the dividend, which is uncertain because it is based on the market interest rate.