The 7-Year Burdened 'Jaehyeong Savings', Is It Finally Seeing the Light?

Subscribers Who Took the Last Train in 2015 Face Maturity This Year
Escaping the Interest Rate Bottom Due to Recent Rate Hikes

[Asia Economy Reporter Song Hwajeong] #Office worker Kim Junho (alias, 41 years old) recently considered prematurely terminating his Jaehyeong Savings account, which matures at the end of this year, but changed his mind. Kim joined Jaehyeong Savings at the end of 2015. Hearing that many of his colleagues who joined the company at the same time had already signed up, he caught the last train before the sunset clause. For the first three years after joining, he received an interest rate in the 4% range, but the rate dropped sharply as a variable interest rate was applied afterward. Having contributed for seven years, the interest rate was too low, leading some colleagues to terminate early, and Kim was also troubled. However, with recent interest rate increases, he decided to maintain the account until maturity and is considering extending it based on the interest rate at that time.

The perception of Jaehyeong Savings, once considered a burden due to its long seven-year maintenance period and low interest rates, is changing. This is because recent interest rate hikes have helped the rates escape the bottom. Along with this, the tax-exempt benefits of Jaehyeong Savings are being highlighted again.

According to the financial sector on the 8th, interest rates on Jaehyeong Savings have been on the rise this year. The interest rates for KDBHi Jaehyeong Savings and KDB Dream Jaehyeong Savings from the Korea Development Bank increased from 2.00% and 1.95% in late March to 2.35% and 2.3%, respectively. KB Kookmin Bank's Jaehyeong Savings also recently applied an interest rate of 2.65%, up from the 1% range last year.

An employee at a commercial bank said, "Until last year, customers who subscribed to Jaehyeong Savings asked about interest rates and also inquired about early termination fees, but these days, inquiries about early termination have decreased."

Jaehyeong Savings is an abbreviation for Worker Asset Formation Savings and was created to help workers and ordinary citizens build assets, as the name suggests. It was designed to help ordinary people accumulate lump sums by offering higher interest rates than other savings products on the market, along with tax-exempt benefits. First introduced in 1976 and operated until 1995, it was abolished due to funding shortages but revived in 2013. The eligibility criteria were a total salary of 50 million KRW or less or a comprehensive income amount of 35 million KRW or less. The product applied a fixed interest rate for the first 3 to 4 years and then a variable interest rate on a yearly basis.

At the time of its revival in 2013, market savings interest rates were in the 2-3% range, but Jaehyeong Savings offered rates in the 4% range. It also provided tax-exempt benefits on interest income, gaining tremendous popularity upon its return, with sales reaching 19.8 billion KRW on the first day of sales, March 6, 2013. The subscription period was seven years, with a maximum extension of up to three years once. Sales ended at the end of 2015 due to the introduction of Individual Savings Accounts (ISA) and other factors. Customers rushed to catch the last train before sales ended, with more than 240,000 accounts added in December 2015 alone.

Despite its initial popularity, Jaehyeong Savings later became a burden. This was because the tax-exempt benefits required the full seven-year maturity period to be maintained. The interest rate was 4% only for the first three years, then switched to a variable rate that kept declining. When the first maturity came in 2020, the interest rate was in the 2% range. At that time, due to the low-interest-rate environment, deposit and savings rates had dropped to the 1% range, so many chose to extend maturity to benefit from tax exemption and slightly higher interest rates. However, as market interest rates rose afterward, many who extended their maturity eventually opted for early termination. Since Jaehyeong Savings adjusts interest rates annually, it took time to reflect market interest rates.