The tax deduction limit of HK$60,000 for both MPF Tax deductible voluntary contributions (“MPF TVC”) and Qualifying Deferred Annuity Policies (“QDAP”) should be disaggregated, i.e. there should be a cap of HK$60,000 for MPFTVC; and a separate cap for QDAP, HKIFA suggests.
Mr. Terry Pan, chairman of the Hong Kong Investment Funds Association (“HKIFA”) Pensions Subcommittee, said, “HKIFA fully supports the introduction of tax incentives to encourage the public to save more and invest early for retirement. This is a cause that we have advocated for a decade.
“MPF TVC is an important step to incentivize employees to bolster their retirement nest egg; but while it is a positive move, the tax deduction should not be co-mingled with that of QDAP as the two products serve different retirement purposes and should be complementary rather than mutually exclusive.
“Each product should be entitled to a separate deduction amount of HK$60,000. Furthermore, this level should be reviewed on a regular basis to ensure that it will continue to be meaningful.”
Mr Philip Tso, vice chairman of the Pensions Subcommittee said, “since its launch two decades ago, MPF has played a pivotal role in raising the public’s awareness about the importance of preparing for retirement. Furthermore, increasingly, employees understand that to achieve adequacy, one cannot just rely on MPF.”
This is borne out by the findings of a survey that HKIFA commissioned in the fourth quarter of 2019 amongst the working population (close to 1,000 respondents).
On average, they estimate that MPF/ORSO can only contribute about 14% to the retirement nest egg. The bulk would come from other sources.
Mr Tso said, “in view of the shortfall, we believe that apart from TVC, QDAP, there are other initiatives or tools that can be deployed.
“The announcement made last week re the Government’s initiative to pay MPF contributions for low-income persons is a step in the right direction as it is targeted at those who are most in need of retirement protection.
“In addition, there are other tools such as ‘matching contributions’ and ‘auto-enrollment’. And the findings indicate that respondents are generally receptive to such concepts. In the coming years, we will continue to explore with the authorities/relevant stakeholder groups the feasibility of introducing such mechanisms.”
Key findings from the survey commissioned in Q4, 2019
Most of the working population put retirement as their top investment goal. 57% of them say they hope to retire at 61. 54% estimate that they need over HK$5 million to support their retirement life; and it would take 14 years to prepare for this.
Over 70% of the respondents have heard about MPF TVC. But so far, only 16% indicate they have joined TVC, though 23% express interest in joining.
Amongst those who are interested, close to 60% have not decided the amount to be put into TVC. 73% indicate they would not put more than HK$60,000, probably reflecting the cap is a key consideration factor.
Regarding which trustees to select for TVC purposes, it seems that the respondents generally incline to stick to the familiar ones (only 11% will consider going to a completely new trustee). As for fund choice, 33% indicate that they would go for more aggressive ones.
As to how respondents compare MPF TVC vs QDAP, the views vary. For those who prefer QDAP, the key reasons cited are that QDAP provide more stable or guaranteed returns; as well as greater flexibility. Meanwhile, those who opt for TVC believe that they can offer higher returns, or that they don’t have to buy annuities at this stage.
Mandatory Provident Fund / Occupational Retirement Schemes Fund
Regarding their current MPF/ORSO investments, over half (54%) say their funds are of medium risk. 55% indicate that the annual rate of return of their funds is below 6%.
As for fees, 35% of the respondents say they are not sure about the level being charged. Only 32% indicate that they believe the annual fees are below 2%. About one-third believe that the fees are over 2%. [Per the MPFA Statistics Digest, the average FER is 1.5%, way below the perceived level.]
As to whether the respondents have consolidated their accounts or switched funds, 38% indicate that they are not sure. 37% indicate they have not made any such moves. A key reason cited for the lethargy is they don’t have the time to handle the complicated procedures.
Mr Pan added, “the findings indicate that there is a lot of education that the industry and the authorities need to undertake to dispel misperceptions and to inculcate the correct concepts.”
“In addition, we believe that the eMPF platform, which can greatly enhance the efficiency of the process and customer experience, will be a major milestone as it will empower employees to have greater ownership of MPF and enable them to more closely and effectively monitor and manage their MPF investments.”
Meanwhile, nearly half of the respondents say they intend to withdraw the accrued benefits in a lump sum because they think they can manage the money themselves more effectively (58% cite this as amongst the top reasons). Also, this will give them greater flexibility to manage their daily expenses (57%).
Based on the survey findings, it seems that deposits constitute an outsized portion of an individual’s total assets (53%) and this will continue into retirement, with employees expecting that deposits will be a key source of their post-retirement income (35%).
Mr Tso concluded, “while deposits provide liquidity and security, one must be mindful that one has to manage other key risks post-retirement, including but not limited to longevity and investment risks.”
“As more and more employees retire, how to help employees deploy the retirement pots effectively in the de-cumulation phase will assume increasing importance.”
“The survey indicates that there are needs which are unique to the post-retirement phase, such as the need for income stream. The fund industry is well positioned to develop offerings that can cater for these needs. The investment lab launched by the MPFA to accommodate more tailored post-retirement offering is warmly welcomed by the industry. We will continue to work closely with the authorities to come up with a framework that is conducive to the offering of optimal and effective solutions pre and post-retirement,” Mr Tso noted.