Korea to allow individuals to invest in state bonds starting with $75 from 2024

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South Korean individuals will be able to invest in state bonds with small amounts as little as 100,000 won ($75.5) starting in the first half of next year.

According to sources from the Ministry of Economy and Finance on Sunday, the government recently completed a legislative notice for amending the Enforcement Decree of the State Bond Act, which contains the basis for issuing government bonds for individual investment.

It is in the process of finalizing coordination with the industry, with an aim to launch government bonds for individual investment in the first half of next year. The minimum investment amount is set at 100,000 won and maximum 100 million won per year. A securities company is expected to be selected as a consignee to start sales.

The move is expected to make it easier for individuals to invest in government bonds, which has been considered the preserve of institutional investors and high-net-worth individuals. It also highlights the appeal of investing in government bonds as a low-risk and medium-yield product.

Government bonds for individual investment are principal-guaranteed savings products that provide a lump sum of principal and interest at maturity. They are composed of long-term instruments with a maturity of 10 or 20 years, in line with the purpose of building medium- to long-term assets for the public.

Individuals can currently purchase government bonds through securities firms, but they have been considered the exclusive domain of financial institutions and wealthy individuals as low-volume transactions have been less active.

According to the Ministry of Economy and Finance, individuals hold less than 0.1 percent of government bonds, which is significantly lower than other major economies such as the U.K. at 9.9 percent, Singapore 5.1 percent, Japan 2.4 percent, and the U.S. 0.5 percent.

The government plans to set the interest rate for individual investment based on the market interest rate when it issues the most popular government bonds. There may be volatility depending on the direction of market interest rates, but given the current level of interest rates, the rate is likely to be set in the mid-3 percent to low 4 percent range.

Unlike regular bonds or stocks, it will not be possible to buy and sell the purchased government bonds for individual investors in the market. These bonds focus on long-term interest income rather than capital gains from bond price fluctuations. They offer advantages such as higher interest income than regular bank deposits and tax benefits for holding to maturity.

If held to maturity, up to 200 million won in investment will be subject to separate taxation at a 14 percent tax rate for interest income, with an additional premium rate applied.

If liquidity is needed, the government will repurchase the bonds through a premature redemption mechanism. However, in the case of premature redemption, tax benefits and premium rates may not apply, and there is a possibility of additional penalties.