China’s insurance crack down seen boosting chances for tax deductible savings plan

China’s crack down on universal life insurance could help unlock the potential of a highly anticipated tax-deductible commercial retirement savings plan but the size of the deductible is key to success of the pilot, market watchers said.

The long-expected but yet to be launched pilot programme could get a boost this year as the top insurance regulator vows to return the industry to its core mission of providing long-term financial security, with products like retirement and health care insurance expected to be the main beneficiaries, they said.

China has been studying the idea for years. Under the proposal, payments on retirement plans offered by commercial insurers can be deducted from taxation, and therefore tax-deferred until withdrawn after retirement. It aims to boost the willingness of households to invest in commercial retirement plans and to supplement existing social security and corporate pensions as China is under mounting pressure to provide social security payments amid an ageing population. In 2015, six provinces saw a shortfall of social security funds as pay outs surpassed income.

“This year could be a good time window to launch the highly-hyped commercial retirement pilot programme as it exactly encapsulates the insurance industry’s core [mission] to offer shelter against uncertainties. A favourable tax code proves to be an effective incentive in foreign countries,” said Zhu Qian, an insurance analyst at Moody’s.

A monthly deductible cap of 200 yuan, as used for tax-deductible health insurance, could be too small in relations to a person’s monthly income to provide enough incentive to spark a buying spree of commercial retirement products, she added. In the US, the 2016 deductible cap was U$18,000 under the 401(k) retirement plan used to stimulate individual’s contributions to the country’s tax-deferrable retirement plan.