Traditional Japanese employers pay a retirement allowance on leaving: a lump sum, a company pension, or both. The formula usually multiplies a base by years of service and applies a lower factor for people who resign of their own accord than for those who retire or leave for company reasons. Because the curve steepens with tenure, it rewards staying and penalises mid-career moves.
The law does not require one. But if the work rules provide for it, the employer must set out who is covered, how it is calculated and when it is paid, and it becomes a wage that the employee can claim. Many companies now fund it through defined benefit or defined contribution plans rather than paying it from the balance sheet.
The tax treatment is generous. A retirement income deduction of 400,000 yen per year of service applies for the first 20 years, and 700,000 yen per year after that. Half of what remains is taxed, separately from other income. The halving is restricted for directors with five years or less of service, and partly for employees with five years or less. From January 2026, the rule that coordinates the deduction between a company payout and a private pension (iDeCo) lump sum was tightened, which affects when senior people choose to take each.
What it means for a foreign employer
- It is a hidden part of the candidate's package. A 20-year employee leaving a Japanese company before retirement may give up a large amount or take a reduced voluntary-leaver rate. Ask what they forfeit.
- Decide whether you offer one. Many foreign companies do not. Paying higher cash instead is common, but expect senior candidates to raise it.
- It is the natural vehicle for exit packages. Negotiated separations are usually paid as an enhanced retirement allowance, partly for the tax treatment.
- Check acquired entities. A Japanese company you buy may carry an unfunded promise.
- Price it into the offer. For a senior executive with 15 or 20 years at a Japanese company, the allowance given up on a mid-career move can be worth tens of millions of yen. Cover it with a sign-on structure or accelerated vesting, or at least name the trade-off openly. An offer that ignores it reads as a pay cut, whatever the headline number.
Sources
- Labour Standards Act, Article 89 (item 3-2).
- Income Tax Act, Articles 30 and 201 (retirement income).
- National Tax Agency, guidance on retirement income and the 2025 tax reform.