For many people, the Hong Kong Mandatory Provident Fund seems like an additional tax on their earnings, albeit, quite small. Every month a little is taken away and put into an account that can’t be touched for many years to come.
With the absence of active advice on how to get the best out of your MPF, most Members of MPF schemes have tended to ignore it, not so much in the hope that it will go away, but because they can’t be bothered to spend time on something they think is worth so little.
Slowly, but surely, this is no longer the case. For those that have been Members for the whole of the 14 years since it started, they will by now have begun to see a reasonable balance grow up in their MPF account, and one that deserves a lot more attention in the future.
For the purposes of this article, I plan to cover a few key issues all MPF Members should take into account, in order to fully utilize the benefits MPF offers.
1. Additional Voluntary Contributions (AVC)
While it is a mandatory requirement that there are minimum contributions made monthly to an MPF of 5% of salary up to HK$30,000 per month (since 1 June 2014) or up to HK$1,500 by both the employer and employee, this should not be treated as the maximum as well. There is no reason why an employee shouldn’t put a lot more into the MPF, especially for higher earning employees, who would otherwise not know what best to use for their savings.
Any contributions made in this way to the MPF get the benefit of buying units in the various available funds at the lowest possible costs. There are no loads and management fees are generally lower than apply for regular mutual funds.
There is also a wide choice of funds available in most MPF schemes these days. Whether investing in the US equity market, Asian region equities, or just into the Hong Kong market, most MPF providers offer the choice. And if you don’t want to make these choices, then there are funds that will do it all for you.
Although it might be the case that the accumulated value of an MPF is not available to use for day-to-day spending, for medical or school fees, or to repay mortgages, for many people this form of “enforced savings” can be their only way to ensure they have some money with which to retire. It won’t be the whole of their retirement income, but the more that is put to work via an MPF, especially in the early days of a working life, the more that can become available on retirement.
2. Fund choices
As contributions are made on a monthly basis, selecting a fund that provides a volatile return actually can provide a far better return over the longer term, that a fund that in more constant. Volatility is good, it enables purchases to be made when markets are down as well as up, and this takes out of the investment equation, the emotional aspect of trying to choose which market is best.
For younger MPF Members, it is far better to choose equity funds that can provide the opportunity to benefit from longer term investment trends. As you get older, then a variation can occur, such as moving some money into managed or balanced funds. Only when in the last year or two before retirement actually occurs is it really necessary to proactively ensure the accumulated gains made are preserved. This can be achieved through use of lower risk fund choices, which will also depend on what your MPF provider can offer.
Choosing and then changing fund choices during the course of an MPF lifetime should be strongly encouraged. All providers have arrangements in place to enable this to be done easily and with the minimum of documentation.
3. Taking Retirement Benefits
The way the MPF is set up, (in most circumstances) only when you retire can you have access to the accumulated assets built up. But if you don’t have any immediate need for them, there can be good reasons not to draw down from the MPF pot straight away. If markets are at an unfavourable stage, then maybe it is best to wait awhile before taking money out. This can lead to greatly improved returns if the timing is handled well.
Despite the many reports to the contrary, the MPF is quite a flexible vehicle with which to accumulate savings. You can keep control on where your contributions are invested, when you draw them out and of course on how much you have put in to create a savings pot. BM