Background
The Mandatory Provident Fund (MPF) system in Hong Kong was introduced in December 2000 to provide a retirement savings scheme for the workforce. Administered by the Mandatory Provident Fund Schemes Authority (MPFA), it requires both employers and employees to contribute to a registered MPF scheme. The system aims to ensure financial security for Hong Kong residents upon retirement, covering employees and self-employed persons aged 18 to 64.
Types of MPF Schemes
There are three main types of MPF schemes:
- Master Trust Schemes: These are the most common, pooling contributions from multiple employers for cost efficiency.
- Employer-Sponsored Schemes: Designed for a single employer, typically for large organizations.
- Industry Schemes: Tailored for industries with high labor mobility, like construction or catering.
MPF Coverage
The MPF system covers most employees and self-employed persons in Hong Kong, except for certain exemptions (e.g., domestic helpers, employees covered by other statutory pension plans, or those working less than 60 days). Both full-time and part-time employees who work for 60 days or more must be enrolled.
Enrollment and Termination
Employers must enroll employees in an MPF scheme within the first 60 days of employment. Upon termination, the employee’s MPF benefits are preserved in the scheme or can be transferred to another MPF scheme of their choice. Employers must notify the trustee of the employee’s termination within 10 days after the last day of employment.
Mandatory Contributions
Both employers and employees are required to contribute 5% of the employee’s relevant income to the MPF, subject to minimum and maximum income levels. As of my last update in 2023:
- Minimum Relevant Income: HKD 7,100 per month.
- Maximum Relevant Income: HKD 30,000 per month.
Example Calculation:
Suppose an employee earns HKD 20,000 per month:
- Employee contribution: 5% of HKD 20,000 = HKD 1,000
- Employer contribution: 5% of HKD 20,000 = HKD 1,000
- Total monthly contribution: HKD 2,000
If the employee earns HKD 40,000, the contribution is capped at the maximum relevant income of HKD 30,000:
- Employee contribution: 5% of HKD 30,000 = HKD 1,500
- Employer contribution: 5% of HKD 30,000 = HKD 1,500
- Total monthly contribution: HKD 3,000
Voluntary / Tax Deductible Voluntary Contributions
Employees can make voluntary contributions (VC) to their MPF accounts to boost retirement savings. Since 2019, Tax Deductible Voluntary Contributions (TVC) allow tax deductions up to HKD 60,000 per year (combined with other qualifying contributions like Mandatory Provident Fund Tax Deductible Voluntary Contributions). TVC must be made directly to the MPF scheme, not through the employer.
Example:
An employee makes a TVC of HKD 50,000 in a tax year. If their taxable income is HKD 500,000, the TVC reduces their taxable income to HKD 450,000, potentially saving them up to HKD 8,500 in taxes (at a 17% tax rate).
MPF Tax Matters
MPF mandatory contributions are not taxable as income for employees. However, voluntary contributions (except TVC) do not qualify for tax deductions. Upon withdrawal, MPF benefits are generally tax-free if withdrawn after age 65 or under specific conditions (e.g., permanent departure from Hong Kong).
Withdrawal of MPF
MPF benefits can be withdrawn under specific conditions:
- Reaching age 65 (retirement).
- Early retirement at age 60 (if not employed).
- Permanent departure from Hong Kong.
- Total incapacity, terminal illness, or death.
Withdrawals can be taken as a lump sum or in installments, depending on the scheme’s rules.
Arrangements for Offsetting Long Service Payment and Severance Payment
Employers can offset Long Service Payment (LSP) or Severance Payment (SP) with the accrued benefits from their MPF contributions. However, as of my last update, there were plans to abolish this offsetting arrangement, with a proposed transition period starting in 2025. I recommend checking the latest updates from the MPFA for confirmation.
Example:
An employee with 10 years of service is entitled to a Long Service Payment of HKD 100,000. If the employer’s MPF contributions for the employee total HKD 80,000, the employer can offset this amount, paying only the remaining HKD 20,000 in cash.
MPF Account Management
Employees can manage their MPF accounts by choosing funds within their scheme, consolidating accounts (e.g., via the MPFA’s ePA system), or transferring benefits to another scheme upon changing jobs. Regular monitoring of fund performance and fees is recommended to optimize retirement savings.
Anniversaries of the MPF System
The MPF system celebrated its 20th anniversary in December 2020. By 2025, it will mark 25 years of operation, a milestone that highlights its role in Hong Kong’s retirement planning landscape.
If you need further assistance about how your company can comply with MPF Scheme, please contact us at Navigator Insurance Brokers Ltd.
