How Much Is the Going Rate for Retirement Pay? Calculation, Taxes, and Payout Options Explained

Retirement pay is a large sum that can shape your life after retirement or a job change. Yet "how much will I receive?" and "how much tax is deducted?" are surprisingly hard to figure out. This article thoroughly explains the going rate, calculation methods, taxes, and payout options for retirement pay, based on the latest survey data and tax rules.

* This article explains general systems and rough guidelines. The going rate differs by survey, the actual amount paid depends on the company's retirement pay rules, and the tax amount varies with years of service and other income. For exact figures, check your company's retirement pay rules, the National Tax Agency's information, or a professional.

What is retirement pay?

Retirement pay (taishokukin) is a lump sum or annuity paid by a company to a departing employee, and for tax purposes it is called "retirement income." It is not a legally mandated system; whether it is paid and how much are set by the company's work rules and retirement pay regulations.

In the MHLW's FY2023 General Survey on Working Conditions, 74.9% of companies had a retirement pay system. In other words, about one in four companies has no such system, and rules differ by company—for example, requiring at least three years of service to qualify.

How much is the going rate for retirement pay?

Average for retirement at the mandatory retirement age

According to the MHLW's FY2023 General Survey on Working Conditions, the average retirement pay for a university/graduate-school graduate with 20 or more years of service and aged 45 or older who retired at the mandatory retirement age was about 18.96 million yen. However, this is only an average and varies greatly by company size and industry.

Differences by company size

The going rate differs greatly between large and small/medium companies. Based on various surveys, the guideline for a university graduate retiring at the mandatory retirement age is as follows.

• Large companies: around 28 million yen
• Small and medium companies: around 11 million yen

Even with the same length of service, a difference of more than 10 million yen can arise depending on company size.

Differences by years of service and reason for leaving

Retirement pay increases with longer service and also varies by the reason for leaving. Generally, the order of favorable treatment is "retirement at mandatory age / departure for company reasons > departure for personal reasons."

• Years of service: the longer, the more it increases, though growth tends to level off beyond 30 years.
• Reason for leaving: personal reasons (such as a job change) tend to result in less than mandatory-age retirement or company-reason departure.
• Education and industry: the higher the education level, the higher it tends to be, and it is also higher in fields such as banking and insurance.

How retirement pay is calculated

The calculation method differs by company, but a representative formula is the following.

Retirement pay = base salary at retirement × payout rate (varies with years of service) × reason-for-leaving coefficient

In addition, a growing number of companies use a "points system" that accumulates points according to service and role. To find out your own retirement pay, the surest way is to check your employer's retirement pay regulations and work rules.

Taxes on retirement pay

Retirement pay is subject to income tax, special reconstruction income tax, and resident tax, but two major breaks—the "retirement income deduction" and "one-half taxation"—make the tax burden lighter than on salary and the like.

Formula for the retirement income deduction

Depending on years of service, the following amount is deducted from retirement pay.

• 20 years of service or less: 400,000 yen × years of service (minimum 800,000 yen)
• More than 20 years of service: 8 million yen + 700,000 yen × (years of service − 20 years)

Any fraction of less than one year in the service period is rounded up to one year. If the retirement pay is at or below this deduction amount, no retirement income arises and no tax is charged.

The taxable amount (one-half taxation)

The amount after the deduction is further halved to become the taxable amount.

Taxable retirement income = (retirement pay − retirement income deduction) × 1/2

Income tax rates are applied to this taxable retirement income, and resident tax is calculated at a flat 10%. Retirement pay uses "separate taxation," calculated apart from other income, and is normally withheld at the time of payment.

Calculation example (25 years of service, 20 million yen retirement pay)

1. Retirement income deduction = 8 million yen + 700,000 yen × (25 years − 20 years) = 11.5 million yen
2. Taxable retirement income = (20 million yen − 11.5 million yen) × 1/2 = 4.25 million yen
3. Apply the income tax rate and 10% resident tax to this 4.25 million yen to calculate the tax

In this example, the retirement income deduction alone removes 11.5 million yen, and the remainder is then halved, so the tax burden on the 20-million-yen gross is kept quite low.

Ways to receive retirement pay

There are mainly three ways to receive retirement pay: "lump sum," "annuity," and "a combination."

• Lump sum (all at once): large tax breaks through the retirement income deduction and one-half taxation. Suited to a lump of funds, such as repaying a mortgage.
• Annuity (in installments): received in installments and still invested while being paid out. Eligible for the public pension deduction, but be mindful of taxation on the total received and of social insurance premiums.
• Combination: receive part as a lump sum and the rest as an annuity. You can combine the features of both.

Which method is more advantageous depends on the tax burden, other pensions, and your near-term funding needs. If your company offers multiple payout methods, compare them comprehensively before choosing.

Points to note about retirement pay

1. Submit the "declaration concerning receipt of retirement income": if you submit it, tax is withheld at the amount with the retirement income deduction applied, and in principle no tax return is needed. If you do not submit it, a flat 20.42% is withheld and you must settle it via a tax return.
2. The deduction amount can change with the retirement date: because years of service round up fractions under one year, the deduction amount can change with just a few days' difference in the retirement date.
3. Rule change from 2026 (iDeCo/DC): the adjustment period when you receive a defined-contribution lump sum first and then receive retirement pay was extended from 5 years to 10 years starting January 2026. If you plan to receive multiple lump sums, be careful about the order and timing of receipt.

Summary

By understanding the going rate, calculation methods, taxes, and payout options for retirement pay, it becomes easier to plan your finances for after retirement or a job change.

• The average for mandatory-age retirement is about 18.96 million yen for university graduates (FY2023 survey), with large differences by company size
• Calculation is generally by "base salary × payout rate × reason-for-leaving coefficient" or a points system
• Tax is reduced by the retirement income deduction and one-half taxation
• The retirement income deduction is 400,000 yen × years for 20 years or less, and 8 million yen + 700,000 yen × (years − 20) for more than 20 years
• Payout options include lump sum, annuity, and a combination, which change the tax burden

Check your own retirement pay in your company's retirement pay regulations, and if you are unsure about the tax amount or payout method, consult the National Tax Agency's information or a professional to make a choice you won't regret.