Corporate annuities exempt from paying tax

China finally agreed to the long-awaited tax deferral for corporate annuities, as authorities seek to address overwhelming pension demand through alternatives to the nation's mandatory pension fund.

According to a joint statement issued by China's finance, taxation and human resources ministries, the corporate contribution to annuities, or fixed annual payments, will be exempt from tax, so will individual contributions as long as it is within 4 percent of an employee's taxable income, starting from January 1.

The change will defer tax on corporate annuities until retirement, an arrangement that will add incentives for companies and individuals to step up their investment in corporate-managed retirement plans and more importantly, will reduce retirees' over-reliance on the state-collected pension fund.

"The move has cleared the way for corporate annuities to become an alternative to the basic state pension scheme," said Yang Qun, an executive with Ping An Annuity Insurance Co, the pension management arm of Ping An Insurance Group.

China has long relied predominantly on a state-managed mandatory pension fund for pension payouts for its retirees. The fund receives 20 percent of payroll from employers and another 8 percent from employees.

Analysts say the state-managed scheme may suffer a funding shortfall due to ballooning pension demand from a rising number of retirees.

To ease pressure on the overwhelmed state pension pot, authorities are now seeking to fund pension payouts through annuities and a voluntary insurance scheme, both of which have been in place for years but remain underdeveloped due to a lack of tax incentives.

Corporate annuities in most developed economies account for the majority of pension payouts, but not so in China. According to Yang, so far an employee's contribution to annuities is very meager.

Yang said employees of 40 percent of her company's corporate clients contribute only 1.5 percent of taxable income.

Analysts have also urged the government to diversify investment options for annuities. China now allows up to 30 percent of annuities to be invested in the stock market.

Authorities have been prudent in opening new investment channels for annuities, fearing that higher exposure to risks would incur a loss in a meager fund reserve.

The tax-deferral for annuities has also raised hopes for the rise of voluntary insurance marketed by insurance companies, which is seen as a third source of pension payouts in addition to state pension and corporate annuities.