Is Tax Deductible Voluntary Contributions of MPF worth it? (1)

Hi, everyone! This is Jerry, the author of this blog.

HK government has recently made a new policy encouraging people to save early for retirements. It is called Tax Deductible Voluntary Contributions (TVC) scheme.  It is like the mandatory provident fund (MPF). The contribution could only be withdrawn at the age of 65. However, the amount you contributed is tax-deductible. The cap is $60k.

For details, please visit: http://www.mpfa.org.hk/eng/mpf_system/system_features/tvc/index.jsp

In order to find out if this TVC is worth investing, I will first calculate how much tax is deducted through maximizing TVC.

If you make $15k per month, you will only save $780.
Since your original tax is $780, you only have to contribute $39k in order to deduct all your tax.
Tax deduction: $780= 0.052 months of salary
Contributions: $39000=2.6 months of salary
It looks unattractive at all when you compared the tax saved and the contributions, not to mention the liquidity of the money sacrificed. Worse still, we haven't counted the management fee which will probably eat up your $780.

If you make $30k per month, you will save $8700.
The original tax is $17.7k while the deducted tax is $9k.
Tax deduction: $8700= 0.29 months of salary
Contributions: $60000= 2 months of salary
Though the tax is nearly halved, it is still not quite attractive unless you don't have better investment options.

If you make $40k per month, you will save $10200
The original tax is $38.1k while the deducted tax is $27.9k.
Tax deduction: $10200= 0.26 months of salary
Contributions: $60000= 1.5 months of salary
This may be attractive if you have idle money. Yet, you still have to look into the details of the fund and compare the cost of it with that of investing by yourself.

If you make $60k per month, you will save $10200.
The original tax is $78.9k while the deducted tax is $68.7k.
Tax deduction: $10200= 0.17 months of salary
Contribution: $60000=1 month
Similar with the previous group. If you have some spare money, you may consider TVC. Otherwise, it is better to invest it yourself.

Even though TVC may be not attractive in numbers, it sill have some advantages. For example, you could use it to diversify your portfolio. Some funds help you invest in stocks outside Hong Kong while some funds helps you invest in bonds. Besides, it is helpful in developing a saving habit as the money is automatically deducted each month.

All in all, as the Chinese old saying, "A faulty move causes you the whole game." Before putting your money in TVC or any other investments, you should look carefully the terms and the fees as well as the reputation of the provider.

Thank you for your reading! See you next time!

Disclaimer: I am not a certified financial planner. Any articles here should not be considered financial advice.