Somewhat redundant, like hot lava
I got a pamphlet from an insurance company in my mailbox at work yesterday. The content was surprising, so I thought it would make a good post. Enjoy!
In Japan, investing in the stock market has a terrible reputation. It is popularly seen as complex and dangerous, and many people are afraid to put their money at risk. Popular entertainment like Loan Shark Ushijima or Kurosagi have numerous episodes involving conning people through investment opportunities, and this is a reflection of common attitudes.
However, the best rate currently available for a savings account with a bank is 0.1%. Some people go for this, others keep money in a safe at home. News reports about ridiculous sums of cash being stolen from homes are fairly common.
The government believes that 43 trillion yen in cash is floating around.
The pamphlet I received is for public servants only, presumably negotiated by the union and possibly featuring better deals than are available to the general public. It contained medical, life, accident, and pension insurance. The last one was new to me, so I'll focus on it in this post.
So what is pension insurance? It's a product sold by insurance companies (solid, safe) that allows you to 'invest' for a better return than bank accounts or cash give you. There are also limited tax advantages.
It appears there are two types: personal pension type (個人年金保険) and normal life insurance type (一般の生命保険) with different tax treatment. If you are more than ten years from the mandatory retirement age, you can join the former, if more than two years from retirement the latter. It appears you can deduct up to 50,000 yen for personal pension and up to 40,000 for normal life insurance from your taxable income.
You can decide how much your monthly payment is, from 2,000 minimum. Not sure if there is a maximum, but you get the full tax allowance (控除) of 50,000 yen when you spend 100,000, which would be 9,000+ yen a month.
They are predicting a 1.25% return, but the small print says this could change.
Everyone seems to use these numbers, I am not really sure why. A normal couple in kosei nenkin with a dependent spouse should expect to get about 220,000 yen a month from their pension, but in order to have a (relaxed? fulfilling?) life you need 349,000 yen a month.
Fortunately this pension insurance can provide you with the missing amount ;)
Of course in practice the amount of money you will need in retirement is going to depend on your particular lifestyle, so the best way to calculate it is to track your spending over time and see how much you need. You may find it is more or less than the mythical 349,000 yen a month...
And here is the payout. If you invest 10,000 yen a month for 40 years, you will pay in 4.8 million yen and receive... 5.938 million yen back, for a 130.1% return. On top of this you will also have annual tax savings of about 6,000 yen for a normal wage earner.
The example repayment is as a pension over ten years, so presumably you can also choose to take it in other ways.
Needless to say, this looks pretty poor to me and far inferior to iDeCo.
Assuming a conservative 5% return on a portfolio of stock and bond mutual funds in an iDeCo account, paying in 10,000 yen a month for forty years would result in a final sum of over 15 million yen (based on this calculator). The tax advantages are also greater for iDeCo, as you can deduct the full amount of the contribution from your taxable income.
Even if your iDeCo is maxed out or you can't contribute to it for some reason, investing in a NISA or even an ordinary broker account would also leave the pension insurance in the dust over the long term.
What do you think? Am I missing something here? Why would anyone pay into something like this?