It’s no surprise people from around the world choose to live in Hong Kong. Not only for the culture, food and travel, but also for the career opportunities and the low tax. Regardless of where you call home, understanding how to start a retirement plan and the ins and outs of things like Mandatory Provident Fund payments requires careful thought.
If you’re living abroad and hold global assets, you may also need to navigate tax and pension rules in multiple countries.
To get you started, here are five tactical tips from HOWARD CLARK-BURTON, CEO of BMP Wealth, including how to improve your retirement finances with a particular focus on British, Aussie and American expats in HK.
#1 Build your investment portfolio
Paying yourself before you pay others is a good long-term strategy. In other words, religiously set aside a portion of your disposable income for your future before you have the chance to spend it. You could save cash in a separate savings account, for example, though investing usually delivers higher returns over time, and will form an important part of your retirement portfolio.
Indeed, investing for the long term helps you ride out periods of market volatility and gives your invested assets more time to potentially grow, thanks to the powerful effect of compound returns.
While investing carries a degree of risk, diversifying your portfolio across different asset classes, sectors and geographical regions could help protect your wealth against potential losses. If one area falls, other parts may rise for an overall gain.
#2 Make Mandatory Provident Fund contributions
The Mandatory Provident Fund is a government-mandated low-cost savings scheme. It’s designed to provide retirement savings for employed and self-employed residents in Hong Kong. Participation is mandatory for most employers, and for employees aged between 18 and 64.
The current mandatory contribution rate is 5 percent (2024/25), subject to the minimum and maximum income levels. Employers are required to match your contributions. Mandatory Provident Fund contributions are tax-deductible up to specified limits. So increasing your contributions could help to reduce taxable income and lower your overall tax liability.
As such, you might want to consider making additional Tax Deductible Voluntary Contributions (TVC) to boost your retirement fund. TVCs are currently capped at HK$60,000 per tax year (2024/25). Discuss this with your employer! They might be willing to match your increased payments (which they can do up to 15 percent).
Brits
Hong Kong’s double tax treaty with the UK provides further incentives for British expats. When you retire in the UK, you could draw an income from your Mandatory Provident Fund without paying UK taxes. This is because your MPF is taxable in Hong Kong, where it is currently free of tax.
Australians
At the time of writing, Hong Kong does not currently have a similar double tax treaty with Australia. However, Australia’s Chamber of Commerce proposed a double taxation in January 2024, so this may eventually bring about change.
Americans
Americans continue to be taxed on their worldwide income. As such – and without a tax treaty with Hong Kong – the Hong Kong MPF income is taxable in the US. Unfortunately, the contributions made by a Hong Kong employer to an American employee’s MPF are also considered taxable in the US, and so is any investment growth.
#3 Consider taking out Private Placement Life Insurance
Private Placement Life Insurance (PPLI) – previously known as a “portfolio bond” – is an offshore product that combines the benefits of life insurance with investment opportunities that may not be available via traditional structures.
A PPLI offers a tax-efficient way for you to grow and preserve your wealth. At the same time you will also benefiting from the reassuring protection of life insurance. Investments held within your PPLI policy grow without incurring immediate taxation.
Brits
If you’re a UK domicile returning to the UK, you could draw down up to 5 percent of your initial investment. Along with any additional investments you make, without incurring an Income Tax charge for up to 20 years. Plus, any unused allowance in a single tax year can be carried forward. This could allow you, for example, to withdraw four percent every year for 25 years. Any amounts above this are subject to Income Tax. However, using policy segmentations or tax calculations – such as top-slicing and time apportionment – could greatly reduce your tax liability.
Australians
If you’re an Australian domicile returning to your home country, withdrawals from your PPLI will be tax free once the policy has been running for 10 years.
Americans
Provided the PPLI is carefully set up and held in a specific type of Trust, any gains made on investments held within a PPLI aren’t usually taxable. However, the underlying investments need to be US compliant. Otherwise, they may fall foul of the Passive Foreign Investment Company (PFIC) regulations and suffer aggressive taxation. Americans will likely need professional financial and legal advice.
A PPLI can also provide an effective estate planning tool since it allows you to pass on your wealth tax-efficiently by using beneficiaries or trusts. However, the rules can be complex, so seek professional advice.
#4 Make the most of the pension or superannuation system
Brits
For British residents and expats, the amount you’ll receive as a State Pension is usually based on your National Insurance (NI) record.
If you have gaps in your record, it could be beneficial to top up your State Pension. You can do this by making voluntary contributions while living in Hong Kong. Provided you meet the criteria set by the UK government, you can make either:
- Class 2 contributions – £3.45 per week in the 2024/25 tax year.
- Class 3 contributions – £17.45 per week in the 2024/25 tax year.
You can also retrospectively pay for NI credits to fill any gaps in your NI record from previous years. While you usually must top up your pension within six years of missing the original payment, there’s currently a unique opportunity to make up for older gaps, as the deadline for making voluntary NICs as far as the 2006/07 tax year has been extended to 5 April 2025.
The amount needed to fill a gap in previous years will vary. Yet with the full rate of the new State Pension currently standing at £221.20 a week, you may find that this represents a superb return on investment.
Even paying the highest rate under Class 3, it won’t take you long to get your top up back once you start drawing your State Pension. When you pass this tipping point, your State Pension – which you’ll receive for the rest of your life – is pure profit.
Australians
While Australia doesn’t have the same State Pension system as the UK, as an Australian expat you can contribute to the Australian Superannuation scheme. This could provide a tax-free income in retirement. You can make what are known as non concessional contributions, capped annually at A$120,000, from 1 July 2024. You could also make up for previous unpaid years and bring forward a maximum of three years’ worth of non-concessional contributions.
Americans
American expats are required to contribute to their Social Security system whilst living abroad if they are self-employed or employed by a US organisation. The US has totalisation agreements with around 30 countries. This is for the purpose of avoiding double taxation of income with respect to Social Security. Unfortunately, Hong Kong doesn’t have such an agreement. However, you may be able to reduce your taxes by using the foreign earned income exclusion or the Foreign Tax Credit.
#5 Start your retirement plan as early as possible
Time is your friend. Thanks to the power of compound interest, even a modest investment today could grow into a healthy savings pot over time. What’s more, by starting your retirement plan as early as possible, you’ll likely have more opportunities to boost your savings, for example through voluntary State Pension contributions and investing.
Looking into how to start a retirement plan? At BMP Wealth, we can use cutting edge financial planning tools, such as cashflow modelling, to help you:
- assess your current financial situation;
- project your future needs; and
- develop a plan for addressing any areas where there could be a shortfall.
Understanding your finances and your retirement goals in this way could allow you to build towards your desired retirement lifestyle throughout your career.
Want more advice on how to start a retirement plan or specifics like the Mandatory Provident Fund? Contact BMP Wealth at info@bmpwealth.com or 2905 9041.
This article about creating a retirement plan first appeared in the Autumn 2024 issue of Expat Living magazine. Subscribe now so you never miss an issue!
