High-interest retail government bonds offer tax benefits, but treating them like bond ETFs could backfire

South Korean investors will be able to buy retail government bonds directly through certain retirement accounts from September, but treating the product like a government bond ETF could lead to disappointment.

Defined-contribution pension and individual retirement pension account holders will be eligible to buy the bonds. Defined-benefit plan members are excluded. The bonds come in 10-year and 20-year maturities, and the first subscription period runs from September 9 to 15.

The retail government bond itself is not new. The government has sold it through dedicated accounts since June 2024. This will be the first time individuals can purchase it directly through retirement pension accounts.

The 20-year bonds issued in September carry a 4.57% annual coupon and a government premium of 0.35 percentage points. Investors who hold them to maturity receive a 4.92% annual rate compounded over 20 years. The Ministry of Economy and Finance describes the pretax return at maturity as about 161.3%, or an average annual return of 8.1%. At 4.92% compounded for 20 years, the original principal grows to about 2.613 times its starting value, producing the stated cumulative return.