Consumer group claims ISA only benefits financial institutions

By Nam Hyun-woo

A consumer group argued Monday that the new individual savings accounts (ISAs) will benefit banks and securities, not customers.

An ISA, which debuted in Korea Monday, is a type of savings account where tax is not collected from interest earned or gains from investments up to a set value. Various types of other financial products are attached to the account.

Citing such benefits, the government has been hyping up ISAs as “almighty accounts” which will increase wealth. However, the Financial Consumer Agency (FICA) refuted that “tax benefits from ISAs will go to banks and securities firms and this means that the product is a waste of people’s money.”

FICA cited an example of an ISA customer who earned less than 50 million won a year and deposited 10 million won in the product for five years. Should the customer gain 5 percent every year from interest earned or gains from investments, he or she would earn 2.5 million won after five years. Since those who earn less than 50 million won a year are exempted from tax on up to 2.5 million won gained from interest or investment, the customer does not have to pay a 15.4 percent interest tax, which would be 385,000 won.

However, according to FICA, such a high return is only possible through equity-linked securities or other types of risky products, for which financial institutions set 0.75 percent of the amount of gain as a yearly commission fee. Thus, the customer has to pay some 375,000 won to the financial institute after five years. The actual tax benefit for the customer is a mere 10,000 won, FICA argued.

Also, the consumer group gave an example of the same customer this time only using a deposit service, which has the lowest 0.1 percent commission rate. If the annual interest rate is 2.0 percent, the customer can enjoy 30,800 won in tax benefits in a year. After paying 10,000 won as commission, the customer will have 20,800 won in actual tax benefit.

The group added that the government’s tax revenue will decrease by 1.92 trillion won if 5 million people open ISAs and some 97.4 percent of it will go to financial institutions.

“Customers will have to pay more than 60 percent of their tax benefits to financial institutions as commission,” an official at FICA said. “We have long argued that the introduction of ISAs should come after further review and study, but the Financial Services Commission just introduced the account without understanding its underlying problem.”