5 important issues to consider about Hong Kong pension schemes

Updated on 4 August 2023

For some time now, Hong Kong pension schemes have been attracting attention for both positive and negative reasons.

So, if you are currently in Hong Kong or moving there in the near future, it’s important for you to be aware of the pension options available to you.

In this article you can find out some background information about Hong Kong pension schemes and consider their uses, and misuses, for tax and financial planning purposes.

1. There are two different types of pension schemes available

Hong Kong’s pension schemes fall under two broad categories:

1. Mandatory Provident Funds (MPF)
2. Occupational Retirement Scheme Ordinance schemes (ORSO)

MPF schemes are typically provided by large insurers and investment providers. They are the most common pension vehicle used by Hong Kong-based employers for meeting their statutory obligations.

ORSOs, on the other hand, can be offered as an alternative to MPFs both for employees and senior executives. They are also an option for anyone looking to top up an MPF arrangement.

The responsibility to administer these schemes falls upon your employer, although trustee, administrative, and investment responsibilities may be outsourced to third parties.

2. ORSOs can provide valuable tax advantages

ORSOs started to gain attention in 2010, when HMRC passed a statutory instrument that provided for assets held in Qualifying Non-UK Pension Schemes (QNUPS) to be free of UK Inheritance Tax (IHT) for UK-domiciled individuals.

While ORSOs are not automatically considered to be QNUPS, this can be achieved if the trust deed and rules are drafted in line with the guidelines laid out by HMRC.

Neither Hong Kong ORSO rules nor HMRC QNUPS rules impose any limits on the level of contributions that can be made to these pensions or the value that may be extracted.

The funding of any ORSO scheme should be based on your retirement planning needs with calculations performed through cashflow forecasting to ascertain any shortfall. While funding a correctly structured ORSO should bring about the IHT advantages you read about above, this should not be the sole rationale driving your planning process.

In addition to IHT, a particularly attractive consideration is the double tax treaty between Hong Kong and the UK. This grants taxing rights to the country where the pension benefit arises and not to the jurisdiction where the member is tax-resident.

It can mean that, in certain situations, if you are a UK resident you can draw pension income from an ORSO with little or no tax payable. Clearly this can be a major advantage in comparison to UK pensions on which Income Tax of up to 45% is payable.

3. You should be aware of the reporting requirements

In recent years, the move towards greater global tax transparency through the Common Reporting Standard (CRS) has led some individuals and their advisers to seek ways to structure assets to avoid any reporting obligations.

While this could be for genuine privacy reasons, it has also been exploited for the purposes of avoiding tax reporting requirements entirely.

Unfortunately, discrepancies will inevitably exist between various authorities and where these are found they are subject to exploitation.

In Hong Kong, ORSO schemes can be set up on either an “exempted” or “registered” basis. Our current understanding is that the latter will be exempt from CRS reporting.

While it is mandatory for schemes with 10% or more of its membership comprising Hong Kong permanent residents to be registered, there is nothing to stop a scheme whose membership does not meet this to still choose to become registered.

Unfortunately, this has enabled single member registered ORSOs to be established for the benefit of a non-Hong Kong resident seeking to hide assets from their relevant tax authorities.

4. it’s important to plan any transfer of a UK pension to Hong Kong carefully

ORSOs also attracted further interest from a UK pension perspective since the introduction of the overseas pension transfer charge in the 2017 Budget. The effect of this imposed a 25% tax charge on the value of UK-tax relevant benefits transferred overseas, unless one of a number of exemptions apply.

Previously there was a free choice over which overseas jurisdiction UK pensions could be transferred to, as long as the receiving scheme was a qualifying recognised overseas pension scheme, commonly abbreviated to QROPS.

However, two of the exemptions listed by HMRC would mean an ORSO remains a suitable receiving scheme for UK pensions, subject to the ORSO trustee registering and operating the scheme as a QROPS.

The two relevant exemptions are:

1. The member is resident in the same country in which the QROPS receiving the transfer is established.
2. The QROPS is an occupational pension scheme, and the member is an employee of a sponsoring employer under the scheme.

As a result, either of these exemptions could potentially be claimed in order to ensure that the 25% overseas transfer charge does not apply, although you need to take care to ensure that the transfer continues to qualify for a stipulated period of time.

5. Expert advice is essential

ORSOs can provide a very useful form of international pension with the additional benefit, if structured correctly, of being highly efficient for UK Income Tax, Capital Gains Tax and IHT purposes.

However, you should be cautious if you are considering establishing an ORSO. We would always strongly recommend that you seek expert financial advice and be wary of firms that appear to be involved exclusively in the promotion of such schemes, especially when a disproportionate emphasis is placed on potential tax and secrecy benefits.

The reason for establishing any pension plan should be the need to fund your retirement savings, and contributions you make should be commensurate to your requirements.

You should be particularly cautious if you are considering funding your ORSO from UK assets.

Finally, as ORSOs by nature are occupational schemes, a legitimate connection with the sponsoring employer should exist.

Get in touch

For more information about Hong Kong pensions please get in touch. You can contact us by email or, if you prefer to speak to us, you can reach us in the UK on +44 (0) 208 0044900 or in Hong Kong on +852 39039004.