Terry Tang, Investment Advisor
November 12, 2019When it comes to saving for retirement, no doubt that RRSP is the most popular investment vehicle in Canada. I would like to make it easier for newcomers from Hong Kong to understand RRSP by comparing it with MPF - a retirement savings scheme everyone from Hong Kong is familiar with. To be fair, we may be comparing apples and oranges but since both MPF and RRSP are based on employment income, it is a good place to start.
Mandatory Provident Funds (MPF)
As the name suggests, MPF is a mandatory investment scheme designed for employees in Hong Kong to save towards retirement. Basically, it is an investment scheme that requires both the employer and employee to each contribute 5% of the employee’s income subject to a minimum and maximum limit. The contributions are invested in funds offered by MPF providers. Some of the top MPF providers in terms of assets under management are Manulife, HSBC, AIA, and Sunlife. Here are some of the top characteristics of MPF:
Contribution is tax deductible, subject to a maximum of $60,000 HKD (Total voluntary contributions since April 2019)
Current employees do not have the choice to choose their own MPF provider, as it is the choice of the current employer.
Once an employee has left an employer, he or she has the option to choose their own MPF provider or transfer the proceeds to the new employer’s MPF scheme.
No withdrawal is allowed until the employee reaches retirement age, which is set at age 60 or above.
Other circumstances allowing early withdrawal include terminal illness and permanent departure from Hong Kong.
In the case of permanent departure from Hong Kong, a declaration has to be made to the Inland Revenue Department (IRD) stating that the scheme member is leaving Hong Kong permanently. This declaration states that the member will reside elsewhere with no intention of returning for employment or to resettle in Hong Kong as a permanent resident.
Typically, the member requires a number of documents for permanent departure, including declaration of permanent departure form and signed by a notary public, MPF withdrawal form from MPF provider, a letter of release from Inland Revenue Department (IRD), which the member will need to clear all outstanding taxes first. A copy of the passport of the country in which the member will reside in may also be required.
It is important to note that making a false declaration of permanent departure is a criminal offense.
"But unlike MPF, RRSP offers greater flexibility when it comes to withdrawal and investment options."
Registered Retirement Savings Plan (RRSP)
RRSP has been around since 1957. The objective of RRSP is to encourage Canadians to save for their retirement. Like MPF, the contributions are tax deductible and primarily invested in the stock markets. But unlike MPF, RRSP offers greater flexibility when it comes to withdrawal and investment options.
MPF vs RRSP Overview
Aside from saving for retirement, RRSP can also help finance down payment for first time home buyer (Home Buyer’s Plan), or qualified education expenses (Lifelong Learning Plan). The idea is that you can withdraw money from your RRSP for these purposes without triggering income tax. If you are planning on buying your first dream home or getting your masters degree in the near future, maximizing your RRSP may be a good idea.
Keep in mind that Canada has a much higher income tax rate compared to Hong Kong, tax deduction offered by RRSP becomes significant especially for high-income earners. The highest marginal tax rate in Ontario is over 50% when combined with Federal tax.
The views and opinions expressed are those of the author and may not necessarily be those of Aligned Capital Partners Inc. The content is for informational purposes only and not meant to be personalized investment advice.