Young Koreans flock to securities-type ISAs that allow direct investment

[Image source: Gettyimagesbank]

Young Korean investors are flocking to securities firms from banks in the individual savings account (ISA) market that has been introduced to help people build assets and provide tax-saving benefits.

According to data from the Korea Financial Investment Association on Wednesday, the total amount deposited in brokerage-type ISAs through securities firms by investors in their 20s and 30s has increased in recent years. The amount reached 1.67 trillion won ($1.27 billion) in February, up from 1.28 trillion won in the same month in 2022 and 2.1 trillion won in 2021 when this type of ISA was first introduced.

The average number of monthly subscribers with banks stood at 12,498 while that with brokerage houses 43,028.

According to Samsung Securities Co. 42 percent of the new ISA openings this year at the firm have been made by people in their 20s and 30s. Samsung Securities manages the largest amount of brokerage-type ISA deposits.

On the other hand, new openings of trust-type and discretionary-type ISAs were lower than those of brokerage-type ISAs over the same period. Trust-type ISAs had been the most popular among investors, with total deposits of 1.66 trillion won in February this year, up from 1.32 trillion won in February 2021, until total deposits in brokerage-type ISAs surpassed those of trust-type ISAs. Total deposits in discretionary-type ISAs stood at about 200 billion won.

ISAs are tax-saving accounts designed to help individuals save wealth through comprehensive asset management. Trust-type ISAs are opened at banks. Investors in these ISAs give instructions to the bank, for example, about which stocks and how many shares they want to buy, and banks implement the instructions. In discretionary-type ISAs, investors delegate all investment decisions to professionals.

Brokerage-type ISAs were launched in 2021 to improve the portfolio of trust-type and discretionary-type ISAs, where a majority of the assets are low-yielding assets, such as deposits and savings. This type of ISAs can be opened at brokerage houses, and investors here have no limit in making their own investment decisions in equities or ETFs.

“The best part about brokerage-type ISAs is that investors can directly diversify their investments into various financial products, like in listed companies or funds,” said a senior analyst at Korea Investment & Securities Co.

[Image source: Gettyimagesbank]

The deposit threshold for ISAs is 20 million won per year, and 100 million won over five years. The biggest feature of ISAs is its tax benefits, with up to 2 million won of capital gains being tax-free. Previously, any dividend income was subject to a 15.4 percent tax, but dividends received through an ISA are tax-free of up to 2 million won.

For any capital gains or dividends that exceed the tax-free limit, a separate rate of 9.9 percent is applied, and those are not subject to the comprehensive taxation of financial income.

“Recently investors are interested in how to increase their actual returns, as dividend income has declined due to poor corporate performance,” said a senior analyst at Samsung Securities. “The number of young investors signing up for brokerage-type ISAs has been increasing as those in their 20s and 30s have started thinking about lowering their tax bill following the debate last year about taxes on financial investment income.”

The tax law revision, which lowered the eligibility age for ISAs since 2021 to “domestic residents aged 19 and over,” from the previously “individuals that have income,” also seems to have affected the recent ISA trend among young people.

After expanding the eligible age group to all ages, the largest deposits in trust-type ISAs are now savings, amounting to 10.75 trillion won as of end-February. In brokerage-type ISAs, stocks and ETFs accounted for 3.23 trillion won and 1.18 trillion won, respectively.

Meanwhile, the special tax law revision has enabled brokerage houses to include bonds as investable assets for clients who have brokerage-type ISAs, leading securities firms to compete to attract more individual investors. Many securities firms are now enabling transactions of various debt products through brokerage-type ISAs, including government bonds, corporate bonds and contingent capital securities, both on and off the exchange markets.