How to save HK$10,200 in Taxes

We all have to pay tax whether we like it or not, but did you know that you could save on tax and plan for retirement at the same time?

There are currently three tax-deductible tools available in Hong Kong: Tax Deductible MPF Voluntary Contributions (TVC), Qualified Deferred Annuity Plans (QDAP), and VHIS Products which I discussed in my last article. Today we will be focusing on TVC and QDAP.

1. TVC: Enjoy Long-Term Growth Through Flexible Investment

TVC is a type of contribution under the MPF system. Anyone that is currently contributing to an MPF scheme is eligible to open a TVC account.?

Feature 1: Free Choice of Fund Types

Unlike your mandatory contribution where your contributions have to go to whichever provider your employer chooses to put your money into, the beauty of a TVC is that you can pick your provider, otherwise known as a trustee. In addition to banks, various MPF trustees such as AIA, Manulife and Sun Life also provide TVC products. They differ by the types of funds available, associated fees and rates of return. For example, AIA currently has 23 types of funds, whereas Manulife offers 29 types and Sunlife only has 14 types. In 2020, AIA got awarded Best TVC Provider for two years in a row.?

Feature 2: Maximum Tax-Deductions of HK$60,000

The Government stipulates a maximum annual tax-deductible amount of HK$60,000 for an individual making contributions to their own TVC accounts. Therefore, an individual in the maximum tax bracket of 17% will be able to enjoy a tax savings of HK$10,200 per year.

Feature 3: Flexible Contributions

Some MPF trustees such as AIA and Manulife provide TVC account holders with the flexibility in making monthly or lump sum contributions, allowing you to free up more cash flow for other investments.?

2. Qualified Deferred Annuity Plans (QDAP): ?Long-term Retirement Planning

QDAP can be viewed as a long-term insurance product. Policyowners make regular contributions during the annuity period (minimum premium payment period of 5 years) and receive regular passive income after reaching the eligible age for retirement.?

Feature 1: Sharing Tax Deductions

Married couples will be able to share the tax deductions as long as both of them have a taxable salaried income.?

For example, Matthew and his wife are both taxpayers and have bought two QDAP policies for themselves. The annual premium Matthew is paying is HK$90,000 while his wife pays HK$30,000 a year. Matthew can apply for a tax deduction on HK$60,000 of the HK$90,000 premium he pays. As the wife has not yet used up the deduction limit (HK$60,000) after claiming the deduction for her HK$30,000 premium, she can also claim the HK$30,000 remaining from her husband’s premium. That way, both of them can apply for HK$60,000 in tax deductions, for a combined total of HK$120,000, saving the couple HK$10,200 each.?

Alternatively, Matthew decides to buy QDAP with an annual premium of HK$120,000. Matthew can apply for a tax deduction on HK$60,000 of the HK$120,000 premium he pays. As the wife has not yet used up the deduction limit (HK$60,000), she can also claim the HK$60,000 remaining from her husband’s premium. Even though the couple only bought one QDAP, both of them can enjoy the HK$60,000 tax deduction save HK$10,200 each.

TVC or QDAP?

Both TVC and QDAP are great tools for growing wealth, retirement planning, and saving money on taxes. Please keep in mind that the government that HK$60,000 is the aggregate tax-deductible amount for both QDAP Premiums and TVC Contributions. So if you invest HK$60,00 in both TVC and QDAP, you will only be eligible to get the tax deduction on the TVC as TVC contributions are deducted first.?

TVCs can be useful for people who want flexibility and enjoy actively managing their investments. It's also a great tool for Expats as they can withdraw everything if they decide to leave Hong Kong permanently. However, there are fees and charges associated with opening a TVC account and investing in funds and returns are not guaranteed.??

QDAPs on the other hand are more suitable for people with a busy work life who find it difficult to manage their investments. QDAP also provides a certain element of guaranteed returns as well as a death benefit for your insurance needs.

Speak to a trustworthy advisor who provides both TVC and QDAP for more advice and look out for some special offers/promotions!