Banks, brokerages and insurance companies have started to sell individual savings accounts, a new financial product designed to help workers and self-employed people grow their money.
An ISA is a versatile account allowing customers to make deposits and at the same time manage a wide range of financial products, such as stock-type or bond-type funds, exchange-traded funds, and equity linked securities.
To help people save money, the government will exempt ISAs from taxes on interest income of up to 2.5 million won ($2,120), and apply a lower tax rate of 9.9 percent instead of the normal 15.4 percent on income exceeding the limit.
To qualify for the tax exemption, workers and self-employed people should earn less than 20 million won a year from their financial assets, excluding their labor income.
A customer who subscribes to the new product can pay a maximum of 20 million won a year into the account for three to five years. Money cannot be withdrawn during the contract term.
The all-in-one account has drawn attention from people as it combines tax exemptions and reductions on interest income with convenience in managing assets.
Financial companies see it as a boon, as it would boost their fee income substantially at a time when the business environment is getting increasingly tough due to low interest rates.
So a fierce war has started among 13 banks, 19 brokerages and two life insurance companies to grab a bigger piece of the pie, which is estimated to reach 10 trillion won this year alone.
While the new product offers benefits, consumers, however, are advised to be fully aware of its limitations and potential risks.
They need to remember that they can benefit from tax exemptions only when they have maintained their accounts until the expiration of their contracts.
They are also advised to take into account the fees they have to pay to the financial company they have signed up with. The fees range from 0.1 percent to 1 percent of the principal, depending on the type of the product.
A more important point is that an ISA does not protect the principal. The new product comes in two types. A customer can either form an investment portfolio for themselves or entrust it to the financial company. Either way, they could incur losses from investing.
Financial companies need to give detailed information about the characteristics of the product to consumers. They should also refrain from recommending high-risk products to customers simply to earn higher fees.
Financial authorities need to step up oversight of financial companies to prevent them from exaggerating the benefits of the new product while concealing its risks.
Some companies seek to lure customers with misleading ads. For instance, they pitch their ISAs using such hyperbole as a “principal-protected product” or “a product guaranteeing a minimum 5 percent annual interest.” Such exaggerated ads should be cracked down on.
