Hong Kong’s Mandatory Provident Fund (MPF) ranks among the least adequate in the world in terms of providing for the future needs of retirees.
The 2018 Melbourne Mercer Global Pension Index 10th Annual Report includes Hong Kong for the first time. The Index analyses, tracks and scores retirement systems based on three different factors: adequacy, sustainability and integrity. Hong Kong’s MPF scheme scored 39.4/100 for adequacy, below the global average of 61.1 and leagues apart from the top-ranking countries (Germany – 79.9, France – 79.5 and Denmark – 77.5) and behind its arch rival, Singapore, whose CPF scheme scores 64.4.
Both in terms of financial contribution and impact MPF, coupled with Hong Kong’s lack of other social security protections, significantly lacks the adequacy to create any meaningful financial / social difference to Hong Kong’s aging population.
What is going to change?
The Inland Revenue and MPF Schemes Legislation (Tax Deductions for Annuity Premiums and MPF Voluntary Contributions)(Amendments) Bill 2018 passed into law on 20 March 2019 with the goal of increasing retirement protection via the voluntary purchase of deferred annuities or extra MPF contributions, incentivized by tax deductions. The Financial Services and the Treasury Bureau are optimistic that the tax deductions will encourage the working population to plan earlier and more efficiently for retirement.
Under the new legislation, taxpayers making such voluntary payments can claim tax deductions up to an aggregate of HK$60,000 per contributor, per year. In the event of a married couple – who must set up a new tax deductible MPF voluntary contribution account – the limit is increased to HK$120,000, provided that the claim of each taxpayer is not higher than the individual limit of HK$60,000.
Based on the prevailing highest income tax rate of 17%, the maximum actual tax savings for a single person buying a deferred annuity scheme will be HK$10,200 a year, doubling to HK$20,400 if a spouse is included.
While previous voluntary MPF contributions can be withdrawn anytime, it’s not the same for extra MPF payments which will be treated in the same way as mandatory contributions meaning they cannot be withdrawn until 65 years old, early retirement at 60, diagnosis of terminal illness or on leaving Hong Kong forever (e.g. expats relocating to another country).
Another change taking place this year is related to private health insurance. The Voluntary Health Insurance Scheme (VHIS) is being rolled out to alleviate the burden on the overloaded public hospital system. Through tax incentives, the government expects that people will choose from a wide range of private health insurance products being offered by selected insurers participating to the VHIS. The government hopes 1.5 million people will shift from public to private health care.
Annually, this means a HK$8,000 tax deduction for a single person and much more when family members are added – the definition of family members include a spouse, children, parents, grandparents and siblings. There is no cap on the number of family members a taxpayer can add to VHIS-approved plans and claim related tax deductions. In general, a married couple with two children participating to the VHIS plan for the whole family can expect a tax deduction of about HK$32,000.
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This article is for information purposes only. Its contents do not constitute legal advice and readers should not regard this article as a substitute for detailed advice in individual instances.