“Invest 300 Million Won and Earn 480 Million Won in Interest”... Retirement Pension Investment in Government Bonds Locks Up Money for 20 Years

[Financial News] Direct purchases of Korea Savings Bonds through retirement pension accounts (IRP and DC) are now possible. The government-guaranteed, ultra-safe assets offer fixed interest rates for 10 or 20 years, along with annual compounding, and are expected to significantly change the retirement portfolios of people preparing for retirement. However, critics point out that the bonds have extremely low liquidity and offer no opportunity for capital gains, making it difficult to expect high returns beyond serving as a means of preserving money.
According to the Ministry of Economy and Finance, subscriptions for Korea Savings Bonds became available this month through individual retirement pension (IRP) and defined-contribution retirement pension accounts. The September subscription period runs from the 9th through the 15th. The bonds are handled by eight sales agencies, including Shinhan Bank, Bank of Hope, Nonghyup Bank, Mirae Asset Securities, KB Securities, Samsung Securities, Korea Investment & Securities, and NH Investment & Securities.

Korea Savings Bonds held until maturity pay an additional interest rate on top of the coupon rate set at issuance, with interest calculated annually on a compound basis. For bonds issued in September, the 10-year bonds offer an annual maturity rate of 4.765%, consisting of a 4.415% coupon rate plus a 0.35% additional rate. The 20-year bonds offer an annual rate of 4.920%, based on a 4.570% coupon rate and a 0.35% additional rate.
Thanks to the compounding effect, the amount received at maturity increases substantially compared with the principal. An investment of 100 million won in a 10-year product would yield approximately 159.28 million won before taxes after 10 years. If the investment were increased to 300 million won, the maturity payment would reach about 477.84 million won. The asset-growth effect is even more pronounced for 20-year bonds. An investment of 100 million won would return approximately 261.32 million won, or about 2.6 times the principal. An investment of 300 million won would return roughly 783.95 million won, including about 483.95 million won in interest—more than twice the original principal.
Retirement pension accounts also provide tax-saving benefits. Ordinary dedicated accounts apply separate taxation on interest income at 15.4%, with an annual limit of 200 million won per person. In retirement pension accounts, however, taxation is deferred until the pension is received after age 55, with no purchase-limit restriction. At the time of withdrawal, only a low pension income tax rate of 3.3% to 5.5% applies. If an investor contributes the maximum annual tax-deductible amount of 9 million won, they can receive up to 1.485 million won back through year-end tax settlement, based on a 16.5% rate. This further raises the effective perceived return.

Among people in their 50s and 60s approaching retirement, a “bond ladder,” or “windmill” strategy, is attracting attention. Under this approach, government bonds are purchased in installments each year so that their maturity dates are staggered. Because principal and interest are paid in a lump sum at maturity, investors can plan their future cash flow in advance according to their post-retirement living expenses or schedule for withdrawing lump sums.
However, the bonds also have several structural constraints that investors must consider. The biggest drawback is that the funds are tied up for a long period. Early redemption is possible after one year, but applications can be submitted only during designated periods each month. If the bonds are redeemed early, the key benefits—the additional rate and annual compounding—are forfeited, and only simple interest at the coupon rate is applied. The result may be worse than that of an ordinary time deposit.
Unlike ordinary bonds, Korea Savings Bonds cannot be traded in the market at all. Therefore, even if market interest rates fall sharply, investors cannot realize trading gains from rising bond prices. Their long-term returns may also fall short of the average returns of equity assets such as the KOSPI Composite Index and the S&P 500. As a result, critics say the opportunity cost could be significant for people in their 30s and 40s who still have ample time before retirement.
A financial-industry official advised, “Rather than aggressively growing assets, Korea Savings Bonds are closer to a ‘fixed retirement insurance policy’ that protects principal and interest steadily while hedging against inflation over 10 to 20 years.” The official added, “It is advisable to carefully assess when living expenses will be needed after retirement and the size of emergency funds, then diversify the bonds into the portfolio as a safety net.”



[email protected] Young-jin Moon Reporter