"Individual Savings Accounts (ISA) have become tax-free deposit accounts, an uncomfortable truth, and the ISA Season 2 should absolutely include a securities-type ISA,” said Chairman Hwang Young, chairman of the Korea Financial Investment Association (Kofia).
In a recent interview with the Asia Economic Paper, the Kofia chairman said the original intent to import the ISA was not to make the ISA a non-taxable deposit account, but it has unintentionally become just that. He said many in the financial industry want it to be corrected.
The ISA is a deposit account where many kinds of financial funds can be deposited, including general deposits, funds for investments and derivative-linked securities, among others, diverse financial products for investments with tax favors. The special account was introduced in March last year by the government to give people opportunities to increase wealth, which is why it was called an “all functional savings account.”
But most of the funds deposited in the account are simply deposits for savings, amounting to some 2.429 trillion won out of 3.886 trillion won in the account, or 62.5 percent. Most of the funds were processed through banks, accounting for 3.124 trillion won (80.3 percent), and securities firms accounted for 19.5 percent of those funds deposited in the account.
Of the total subscribers for the ISA account, 91.6 percent or 2.073 million were processed through banks, while only 8.34 percent came through the securities firms.
The Korean version of a tax free savings account, which was benchmarked from a U.K. scheme, went into effect in March last year. The government originally hoped it would boost household wealth amid a rise in “floating” money prompted by low interest rates and uncertainties in the investment market.
A total of 33 financial companies, including banks, securities firms and insurers, have begun introducing tax-free Individual Savings Account, or ISA, which allows customers to hold a wide range of retail investment vehicles in a single arrangement with a financial company.
“In an era of low interest rates and sluggish growth, the ISA system will practically help people to increase their assets ... as it offers tax break benefits and a convenient way of wealth management,” said Hwang Young-key, Korea Financial Investment Association chairman.
With the government-backed scheme, consumers now can hold diverse financial products, such as cash deposits, funds and stock investments, in a single account with tax exemptions of up to five years on their financial gains.
Tax breaks range from 2 million won ($1,700) to 2.5 million won per person on interest earnings and dividends made from the ISA. Also, these ISAs will even offer lower tax rates for earnings that exceed the exemption amount at 9.9 percent in taxes, lower than the regular rate of 15.4 percent.
Savers can invest their cash up to 100 million won, 20 million won per year, and they are required to maintain the account for three to five years. The new scheme is expected to spark a major move in retail money as industry experts expect the market will value over 10 trillion won.
The launch comes as Korean consumers face difficulties in finding asset management tools as interest rates have stayed at record lows for months and baby boomers nearing the end of their working lives seek better ways to handle their retirement savings.