Update: China has expanded its voluntary tax-advantaged private personal pension scheme nationwide from 15 December 2024, following a successful pilot phase in 36 cities. Over 70 million private pension accounts had been opened under the pilot phase. This article has also been updated to include China’s improvements to the scheme as of 15 December 2024, which include expansions in the scope of eligible pension fund products and eligibility for early withdrawals. However, the contribution limit and tax benefits under the scheme remain the same. Employers do not participate in the funding or administration of this individual pension scheme. However, they should be aware of its existence when developing retirement and financial wellbeing strategies for their employees.
Background
On 25 November 2022, the Chinese government launched the pilot phase of a voluntary tax-advantaged private personal pension scheme under the third pillar of the country’s pension system. This new scheme aims to assist China in overcoming gaps in its current pension system as the country struggles with one of the most rapidly aging populations in the world, according to the World Health Organization.
China, like much of the world, has a pension readiness problem. Pensions have traditionally been offered through a Pillar I social scheme with the option for Pillar II employer-sponsored supplemental plans introduced in the last 20 years. An aging population, declining birthrate, low social pension benefits, and limited uptake of employer-sponsored plans have created a need for an official voluntary third-pillar pension scheme that can utilize current individual savings in a regulated, sustainable, and tax-efficient manner to help individuals save for retirement.
Key details
The pilot phase of the new private pension scheme was officially launched in November 2022 in 36 cities and was initially set to last a year before being implemented at a wider scale. The first batch of eligible cities include Beijing, Shanghai, Guangzhou, Tianjin, Shenzhen, Hangzhou, and Chengdu. From 15 December 2024, the Chinese government expanded implementation to cover all cities in China.
Participation in the private pension plan is open to all Chinese citizens and resident workers who currently contribute to the basic pension insurance for urban employees or the basic pension insurance for urban and rural residents.
Individuals must open personal pension accounts through the “Personal Pension Information Management Service Platform” at a qualified commercial bank or a qualified wealth management company that meets the criteria published by the China Banking and Insurance Regulatory Commission (CBIRC).
Individuals are limited to one pension account each, which will be used to handle all transactions including contributions, earnings, and tax payments.
Participants are allowed to make voluntary contributions of up to RMB 12,000 per year into their individual pension accounts and enjoy the following tax benefits:
Pre-tax deductions of up to RMB 12,000 from the annual taxable income of participants; and
A reduction of the tax burden on pension benefits on receipt from the current 7.5% to 3%. The Chinese government also announced that earnings from investments will not be taxed for the current time.
Participants can use their pension contributions to purchase eligible pension fund products that include banking wealth management products, deposits, insurance, and mutual funds. The China Securities Regulatory Commission (CSRC) specified a list of eligible pension fund products and eligible distribution companies.
Participants are allowed to withdraw their pension benefits at the age of retirement and in the event of disability, death, or permanent immigration abroad.
From 15 December 2024:
Government treasury bonds, index funds, specific pension savings and pension wealth management products have been added to the scope of eligible pension fund products.
Participants who suffer from serious illnesses, qualify for unemployment insurance benefits, or are receiving minimum subsistence allowances may also apply for early withdrawal of funds.
Participants may choose to receive their pension benefits on a monthly, instalment or lump sum basis.
Employer action: FOR AWARENESS
The pension reform does not have a direct implication on employers as it does not create a financial or administrative role for them in the new pension system. However, employers could benefit from learning about the voluntary private pension system as they periodically design and change their occupational pension plans and financial wellbeing strategies.
Further Information
