Can a Corporate Retirement Scheme Help You to Protect Your Wealth?
Growing a business can be good for your wealth but many successful entrepreneurs have their wealth tied up largely in one place – the business. There may be good reasons that have prevented you from realising some liquidity: the growth and profitability of your business has meant there has never been a need to tap into your equity; you have always regarded your business as also being your best possible investment; or you may have been unwilling to dilute or relinquish control of the business to others.
Whatever your reason, if your intent is to grow the business to provide you and your family with a high standard of living – not just for the present, but for the duration of a long and comfortable retirement and for the benefit of future generations – keeping all your eggs in one basket can create a sizeable problem.
While your company may enjoy limited liability – such that your personal liability is restricted to the amount of your investment in the company, even if it subsequently goes bankrupt and has remaining debt obligations – if all your wealth is tied up in the capital of that company, you are effectively still carrying unlimited liability should the company fail.
It doesn’t have to be that way. Setting up a corporate retirement scheme is a tax-efficient way to protect you and your family’s future standard of living.
Corporate retirement schemes can be created in Hong Kong under the Occupational Retirement Schemes Ordinance (ORSO), which was brought into force in October 1993 and is the governing legislation for the regulation of voluntary occupational retirement schemes operating in or from Hong Kong. The Mandatory Provident Fund Scheme Authority (MPFA) regulates the retirement schemes industry through a registration system to ensure that all voluntarily established ORSO schemes are properly administered and funded.
In addition to providing an incentive for attracting and retaining staff, as well as utilising the tax relief available in respect of contributions, retirement schemes offer further advantages to employers. An ORSO may apply to be exempted from the investment restrictions and audit requirements of the Mandatory Provident Fund Authority.
There are no legal limits to the amounts that employers may contribute to ORSO exempt schemes although there are limits to the tax relief available. Members may also make voluntary contributions if the rules of the scheme provide for it.
ORSO exempt schemes do not have mandated minimum retirement age. The company simply notes a specified minimum retirement age when establishing the scheme. Therefore, if liquidity is required at a future date it can be drawn from the pension provided that the individual is over the specified minimum retirement age.
Benefits can be paid out as lump sum; members are not required to annuitise their capital. Investment income and benefits are tax-exempt in Hong Kong. ORSO exempt pension schemes are established as a type of trust. This means that the trustees have a fiduciary responsibility to care for your pension and make sure that all financial investments are regulated.
Subject to the trustee agreeing to hold the asset, an Exempted ORSO scheme can invest in a wide range of investments. It also means that assets contained in the retirement scheme do not generally form part of an individual’s estate for credit proceedings. In case of death, the retirement scheme avoids probate and the residual fund will be paid, in accordance with the governing rules, to nominated beneficiaries as a lump sum or it can continue paying income.
Sovereign Trust can act as trustee to most types of corporate retirement schemes established as trusts under the ORSO. Sovereign consultants will liaise with the sponsoring employer in drafting the trust deed and rules for the plan, including eligibility, contributions levels and investment options.
Contact Tom Broughton for further information or to discuss your options.