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China to Introduce Its 401K Tax-Deferred Pension Scheme in 2014

12-09 15:13 Caijing
Some of the income tax, which is now imposed on pension contributions from both corporate and employees, will be deferred until withdrawn during retirement.

China is getting ready to launch a tax-defered corporate annuity, its own 401-style pension scheme, in an effort to consummate a multi-tiered pension system.

Starting from January 1st, 2014, contributions to the pension fund, both by corporate and employees, will be partly exempted from income tax based on individual employee's paycheck, said the country's Ministry of Finance, the Ministry of Taxation and the Ministry of Human Resources and Social Security in a jointly issued notice last Friday.

The tax will be deferred until withdrawn during retirement, the statement said. It will no longer be imposed on returns of pension fund investment as well, it added.

The ground-breaking move means the government is attempting to promote the second-pillar pension system which is widely adopted in developed countries.

A standardized, state-run system, or the pillar 1, is the most important pension format in China which is drawing increasing concerns due to hefty shortfalls amid a growing old society.

By the end of the second quarter of 2013, nearly 60,000 companies covering 19.57million employees had joined the corporate annuity scheme which accumulated more than CNY530billion in retirement savings, data from the Ministry of Human Resources and Social Security showed.

The new policy is expected to boost China's corporate annuity funds by CNY100billion-200billion annually while pouring more money into the capital markets, including highly-secure and low-yielding government bonds.

The introduction of the pillar-2 scheme sheds some hope on deferred taxation for the pillar 3, or voluntary private funded accounts, which is still relatively new in China.

The World Bank outlined three pension formats in 1998 which have since been adopted by many economically reforming countries in Central and Eastern Europe.

 

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