If you’re a Hong Kong resident you’ll most likely be contributing to an MPF along with around 85% of the working population.
I know from talking to many clients that confusion abounds about the scheme. I get it, it’s not the most scintillating of topics, but with many Hong Kong residents facing a pension shortfall when they retire, it’s definitely worth spending a bit of time getting up to speed on the subject.
To make the task easier, I’ve put together this comprehensive FAQ to look at what the MPF is and what you should be doing with yours.
What is Hong Kong’s MPF?
Set up in 2000, Hong Kong’s MPF – short for Mandatory Provident Fund – is a compulsory retirement scheme. In July 2020 it entered the top 20 of the world’s biggest pension funds with 4.5million members and a value of over HK$1trillion. 85% of Hong Kong’s workers are enrolled in the scheme. Prior to its roll out, many of these individuals had no retirement savings at all.
Who contributes into the MPF?
Mandatory contributions of 5% of an employee’s income are made by both employer and employee, subject to a minimum income level of HK$7,100 and a maximum of HK$30,000. At this upper limit, for example, each party must contribute HK$1,500 each month. These mandatory contributions are subject to a tax deduction. Some employers may contribute more than 5% subject to certain conditions. You should definitely find out exactly how much your employer contributes as well as any conditions attached, such as whether you can take it with you if you change jobs.
Can I choose my MPF provider?
Yes you can. While your employer will automatically enrol you into the company’s MPF you are perfectly free to choose which of the providers – mostly major banks and insurance companies – that you would like to pay your contribution into.
Is my MPF ample to support me in my retirement?
Well, not exactly. Hong Kong’s MPF falls way short of the mandatory schemes in other Asian tiger economies. Singapore demands a contribution of 37% for anyone under 55 while in Malaysia a 23% contribution is required.
While over the two decades of the MPF’s existence its investment funds have given annualised returns of 3.9%, comfortably exceeding the rate of inflation, according to a survey carried out by Manulife International in March 2020, the average account balance of HK$225,000 falls far short of the aspirations of the average Hong Kong resident, who hopes to have HK$15,000 a month to spend. That level of expenditure would require a balance of HK$3.97million based on an individual retiring at 63 and living to 85, the average lifespan in Hong Kong.
That leaves quite a shortfall for the average retiree! To put it bluntly, the mandatory contributions alone will not be sufficient for a comfortable retirement.
According to the South China Morning Post 20% of Hong Kong’s residents live below the poverty line and 44% of them are over 65 years of age. In addition, the population is ageing fast with 450,000 new retirees predicted over the next five years. It is calling for an overhaul of the MPF to bring it into line with living costs in one of the world’s most expensive cities.
Can I pay more than 5% of my salary into my MPF?
It is possible to pay in more than 5% of your salary but any more than that is regarded as a voluntary contribution and not deductible for tax purposes. Many experts believe that reviewing this policy and offering tax incentives on voluntary contributions could be one way to address the problem of insufficient retirement savings.
I’m self-employed, should I pay into the MPF?
If you are earning over the HK$7,100 minimum monthly threshold then you should be contributing into an MPF. While business owners frequently find their budgets stretched, don’t be tempted to avoid contributing and benefitting from the tax advantages on mandatory contributions.
I have changed jobs a lot and have a few different MPFs, can I consolidate them?
This is a common issue and it can be tricky to manage a number of different funds and deal with the deluge of associated paperwork related to each. It really is far easier to have one account and I recommend that you consolidate all your MPFs into one place. If you have a financial adviser, their help will be invaluable in this task.
There are so many different funds I could pay into – how do I choose?
The money you save into your MPF is invested in the financial markets to generate a capital return. You can either opt for the default investment strategy, which is a mixed asset fund put together by your MPF provider, or you can choose how your investment is allocated from a list of many different funds, from Hong Kong or elsewhere, including equities, bonds and mixed assets.
If you opt to choose your asset allocation you need to base your decisions on your risk tolerance. That involves looking at your investment timeframe, how much risk you can afford to take and how much risk you need to take. While there is a lot of advice available online, both from the MPF providers themselves, the MPF Fund Platform and specialist comparison websites, these are important and difficult decisions for the layman or woman to make and should really be taken within the framework of a broader financial plan.
How can I ensure that I have enough to live off in retirement?
Again, you need a financial plan. Ensuring that you are not one of the 44% of retirees living below the poverty line in Hong Kong will take some work. You need to look at your personal retirement goals and analyse how you are going to achieve them.
A good financial adviser can make this task a lot easier. They will carry out a detailed financial needs analysis, using sophisticated risk profiling tools to establish your tolerance to risk, and use that information to advise you on how best to invest your MPF contributions. They can also determine whether it is in your interest to make voluntary contributions over the mandatory amounts or invest in other products better suited to achieving your goals.
When it comes to retirement saving, you don’t want to be crossing your fingers that you’ve made the right decision. Having an expert on board will give you peace of mind that your financial plan is a sound one which really will deliver a comfortable retirement.
If you live in Hong Kong and would like further information about how to get the best out of your MPF, contact me today for an initial chat. Together we can make sure you are on track for a worry-free retirement.
Over the years I have helped hundreds of clients organise their finances. For me, financial planning is not limited to a single piece of advice and then moving on as is common in the industry. Instead, I like to build long term relationships and help people manage their finances to meet their needs as circumstances change. As a result, many of my clients have been with me for a number of years. They live throughout Asia and further afield but know that I am only a Skype or telephone call away.
