I'm moving to Hong Kong and understand that (almost) every employer and employee must contribute to the MPF (Mandatory Provident Fund) pension fund.
However the maximum contribution levels are very low (HKD $12,000 from both employer & employer).
Is this all that can be done? Do people in Hong Kong supplement the MPF with private schemes? What is the most effective way to contribute more in a tax effective way?
This wasn't an issue in HK when I lived there in 2004.
Hong Kongers are not taxed to death as are most citizens of modern westernized countries. Having no need to pay for their own military defense and almost no social safety net, in Hong Kong tax is almost non-existent.
Well, when I lived in HK back in 2004, there were simply no taxes to worry about on family savings.
In 2004 there were :
There was a salaries tax. I think the top bracket was around 10-15%. I think the zero bracket was somewhere around HK$200,000. There was also a property tax. And there was a much higher gas tax than you will find anywhere in the world, but distances are short. It may be that automobiles are also taxed, but the frequent subways, buses and numerous taxis go everywhere you'd care to go.
The MPF was implemented a year or two before I left. The discussion in the press, as I recall, was that people be forced to provide for themselves a minimum retirement savings so as not to rely upon government or charitable support. There is nothing preventing a person from saving more, but the additional amount saved could be in some other account, not subject to the strict withdrawal rules of an MPF account.
As a local Hongkonger who has worked in financial industry, allow me to share my view on this old question, so that it becomes useful to readers today.
Before answering your questions, I shall explain some key points of MPF and why it should be treated differently than retirement saving plans commonly seen in Money.SE.
MPF's limit is the upper limit for mandatory contribution
Most (if not all) MPF providers allow both employers and employees contribute any amount voluntarily. None that I know impose a limit on how much you can contribute. Though it is uncommon for employers to provide matching on employees' voluntary contributions.
As a sidenote, the contribution limit has been raised to $1,500/mo each for employer and employee since 2014. There are suggestions to further raise this limit.
There are no capital gain taxes in Hong Kong
On this site, you commonly see Americans being encouraged to contribute to tax-sheltered accounts. This advice makes sense when the government is taxing you 30% of what you have earned through investment. In Hong Kong, there are no capital gain taxes. Whatever you earned in your ordinary broker account are all yours. The government is only charging you a minimal stamp duty when you buy and sell (and not even on ETF). Since there are no tax, the difference between investing through broker and retirement plan (MPF) in Hong Kong is much less than that in the US: Tax sheltered accounts has no advantages if there's no tax to shelter.
MPF has a much higher expense ratio / management fee than ETF listed on SEHK
Since there are no tax benefits between MPF and stock broker, let's look at their fees. At the time of writing, the stock fund with lowest fee still costs you 0.65% every year, and a majority are over 1%. And mind you, employer's contribution must stay in the MPF company that the employer chooses. Only your contribution (mandatory or voluntary) can be moved to another MPF company of your choice. You are likely to suffer from a higher expense than shown in the table.
(Aside: The situation was way worse when this question was asked. >2% funds were common. Some reports was published criticizing the poor performance despite (because of?) high expenses. The government interfered requiring all MPF companies to provide a "low" expense (0.95%) fund for employees to choose from. This created some low expense funds and made existing funds charge less.)
In contrast, ETFs can have a much lower expenses. HSI ETF can go as low as 0.09%. Vanguard and iShares ETFs, while charging more than the American counterparts, are all way below MPF's 0.65%. The only drawback of Hong Kong ETFs is that there isn't any good World Stock ETF. (There's one but it's synthetic.) You need to settle with a few regional ETFs.
No, neither Vanguard nor iShares provide MPF services as of today.
Now to answer your question:
Is this all that can be done? Do people in Hong Kong supplement the MPF with private schemes?
No. You can voluntary contribute to your MPF. Some MPF companies even allow you to withdraw the voluntary part of your MPF at any time, so it can act as some sort of money reserve. I won't do voluntary MPF, though, due to it's high expense.
You can also buy stock or stock ETFs through your broker. Following a price competition, some brokers now charges minimal commissions and some others provide various fee waivers.
What is the most effective way to contribute more in a tax effective way?
Shop for a broker with low commission and custodian fee. Then dump your money onto a few stock/bond ETFs. If you don't like ETF, blue-chips and government bonds will also do.
