How does it feel when you fail to get your hard-earned money back after contributing to a project? Of course, everyone feels disappointed whenever they lose the money they worked so hard to get. This is the exact feeling expatriates who left Japan get whenever their contributions to the Japanese pension scheme aren’t refunded due to their lack of familiarity with the Japanese pension refund system.
While some of us working and living in Japan may very well stay long term, for many expats, their experience in the country only lasts for a few years before moving on to other countries. We are required, while earning an income in Japan, to contribute to the Japanese Pension system, and if you are here only temporarily, you will not be able to enjoy any benefits from the national pension. Thankfully, there is a system to claim some mandatory pension contributions paid for expatriates who plan to return to their home countries.
More often than not, expatriates become unduly troubled about the fate of their pension funds when they are about to leave Japan. To prevent this avoidable agitation and possible loss of pension funds, expatriates must understand how pension refunds work in Japan and the options they can explore to claim their pension contributions.
Frequently Asked Questions by Expatriates on Japanese Pension Refund
The Japanese pension refund system might look foreign and complicated to expatriates. An excellent way to allay these fears is to look at some of the most asked questions regarding the Japanese pension refund system.
Who is Eligible for Pension Refund?
In Japan, not everyone can request a pension refund, and some criteria must be met before a person can ask for a pension contributions rebate. The criteria are:
They must not be Japanese nationals. Even though they plan on leaving Japan permanently, Japanese citizens cannot request a pension refund. Only foreign nationals can.
They must not have an address in Japan. For an expatriate to be qualified for a pension refund, they must have moved out of Japan permanently and plan not to return.
They must not hold a valid Japanese visa. When an expatriate files a pension refund, their visa must have expired. In cases where the visa is still valid, such expats need to cancel their visas.
They must have paid the pension contributions for at least six (6) months.
They must file for a pension refund within two years of leaving Japan. A pension refund can only be granted if the request is made within two years of the last pension contribution.
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How Much Refund Can I Get Back?
The total rebate an expatriate can get back varies depending on the number of months and the amount contributed. Generally, the pension refund rate is calculated based on the number of months payments were made. This applies to the National Pension Scheme and the Employee’s Pension Insurance Scheme (EPI).
Another critical point is that the payment of pension refund stops at 36 months (3 years). This tells us that even though an expatriate pays pension contributions for six years, the maximum refund will be calculated to just 36 months if they want their pension refunded. The rest of the payments will not be considered. If, after receiving the refund and an expatriate decides to return to Japan for employment, the pension scheme will start afresh, and the previous payments will not count anymore.
Will the Pension Refund be Taxed?
The Japanese pension refund is subject to withholding income tax of 20%. This tax is deducted before the rebate is transferred overseas to the expatriate. The withholding tax deducted from the refund can be recovered through a tax representative in most circumstances.
The tax representative will have to file an annual tax return to claim this tax. Although the 20% tax might be returned, the charges for hiring a tax representative may render the remaining money meager unless the amount to be refunded is substantial.
Social Security Agreement and Lump Sum Withdrawal
There are two ways expatriates can claim some of their tax refunds and prepare against problems that might arise. The two solutions are the Social Security Agreement and Lump-sum withdrawal.
Social Security Agreement
The social security agreement is the consensus between Japan and other countries that makes it easier for expatriates to enjoy tax and pension benefits from Japan and their home countries, especially when they won’t be staying in either country for long. These agreements, called totalization agreements, prevent expatriates from paying double pension contributions and enjoying certain privileges that other expatriates don’t.
Social security agreements between Japan and some countries allow expatriates from those countries to continue their pension contributions in their home countries after leaving Japan and continue paying the contributions in Japan if they later come back to Japan. In addition, these arrangements allow expatriates to enjoy pension benefits such as disability, survivor, or other benefits attached to paying pension contributions.
Countries with social security agreements with Japan include; Germany, the Republic of Korea, Canada, the United States of America, France, Australia, Belgium, the United Kingdom, Netherlands, Czech Republic, Spain, Ireland, Brazil, Switzerland, Hungary, and India. In addition, other countries are currently in the process of being integrated into social security agreements.
Expatriates will get their pension refund as a lump sum. For a lump sum withdrawal request to be granted, the expatriate must have fulfilled the criteria stated earlier in this article. Then, you simply request a “Lump-sum Withdrawal Form” and submit it to the Japanese pension service after filling in the details.
Steps To Getting a Lump-sum Pension Refund
Take the following steps to get the pension refund in a lump sum.
Employ the services of a tax representative in Japan who can follow up on the refund processes after you have left Japan.
Ensure you are eligible by fulfilling the criteria and properly leaving Japan.
Download, fill, and submit the “Lump-sum Withdrawal Form.”
You will receive the pension refund within six (6) months with a payment notification.
To apply for the 20% tax return deducted from the rebate, follow the steps below.
Send the “Notice of Payment of Lump-sum” to your tax representative in Japan.
Have your tax representative file an Income Tax Return, with him verifying the account where the payment will be made.
National pension systems are generally not advantageous to expat professionals who plan to live and work in different countries throughout their careers. Moving from country to country every few years makes it difficult, if not impossible, to qualify for any pension benefits in any country. This is one of the many reasons mobile professionals are generally compensated with higher incomes to offset these disadvantages.
Depending on your specific circumstances, in Japan, you can recover some of your pension contributions.
National pensions alone are not the answer
Regardless of whether you do plan to stay in Japan long enough to enjoy the full benefits of the Japanese pension or you plan to move from place to place, the reality is that no national pension system is likely to cover your entire retirement needs and enable you to have a happy, fulfilling post-work life. Nowadays, national pensions only ensure people are not entirely destitute in their older age, but you shouldn’t expect to be living large on any country’s pension system.
It is each person’s responsibility to secure their financial future themselves. You will need to plan for your own happy financial independence, not counting only on any national pension but perhaps including it as part of the overall plan. This means having private retirement plans and investments to cover the likely significant shortfall.
We have a simple online retirement calculator you can use to get a general idea of how much you might need to save for your retirement or financial independence goals.
If you are worried about your retirement, contact us for a free initial consultation. Argentum is Japan’s premier licensed financial planning firm serving the expat community. We provide advice on portable and tax-efficient retirement strategies designed for the modern mobile workforce. We’d be happy to help you get started on a fulfilling financial future.
Argentum Wealth does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
Argentum Wealth Management is licensed through the Japanese Financial Services Authority to give financial advice. The FSA strongly recommends that you only receive financial advice and services from a locally licensed and regulated firm.