KOREA CAPITAL MARKET INSTITUTE

 We propose the Korean Individual Investment and Savings Scheme (KISS) as the main vehicle for encouraging Koreans to increase their liquid assets.

 With the primary objective of increasing savings for purposes other than retirement plans, KISS is expected to diversify Korea’s household assets, most of which have so far been invested in real estate and bank products. KISS will also replace most of the existing tax-favored financial vehicles, thus simplifying tax laws and regulations and leading to fair treatment of financial consumers.

 We begin by studying overseas cases: the Individual Savings Account (ISA) in the UK, the Tax-Free Savings Account (TFSA) in Canada, and the Nippon Individual Savings Account (NISA) in Japan. Also included in the study are retirement plans, such as the Individual Retirement Account (IRA) and the Roth IRA in the US and the Registered Retirement Savings Plan (RRSP) in Canada. The comparison of these tax-free savings schemes reveals some major common features. First, contributions to a tax-free savings account come from after-tax income, and investment returns (including interest income) arising from the account are exempt from tax. Plus, assets in the account can be withdrawn without any restrictions. Second, tax-free accounts examined in this study are available to anyone, without consideration of an individual’s income or wealth conditions. For example, ISAs are open to all UK residents, TFSAs to all Canadian residents aged over 18, and NISAs to all Japanese residents over 20. Third, tax-free accounts are available in any financial institution. Fourth, tax-free accounts provide a wide range of investment options. Unlike ISA and TFSA schemes, the NISA scheme is adopted under the policy drive to increase investments in the stock market. Hence, NISA assets should be invested in stocks and investment trusts.

 KISS includes the aforementioned features shown in tax-free account schemes and also reflects Korea-specific demands. We propose two types of KISS, both of which have the following features in common. First, contributions of up to KRW 10 million per person to a KISS account are made from after-tax income. Second, the investment returns (including interest income) are not taxed. Third, KISS accounts should be available in any financial institution. Fourth, KISS assets can be invested in a wide range of investment assets. The first type of KISS we propose is a tax-free account that is available to anyone aged over 19 and without any limit on how much or when the savings can be withdrawn. This is to enhance the public’s access to KISS because any withdrawal limit will discourage low income earners from participating in the scheme. For the second type of KISS, we propose a scheme that excludes those in the top 10%  income bracket taking into account that tax-incentives for high income earners are a politically-charged issue. Under the proposed scheme, the portion of contributions invested in stocks is income-deductible as long as the account holder agrees to lock in the investments for more than 10 years.

 Expectations are high for KISS to take hold as a main investment and savings tool for average Koreans.