I'm writing this with my clients in mind because I am looking for an avenue to share the knowledge to many people at one go.
What is Supplementary Retirement Scheme (SRS)?
The Supplementary Retirement Scheme (SRS) is a voluntary scheme initiated by the government to complement the CPF and encourage individuals to save for retirement. Contributions to the SRS scheme are eligible for tax relief.
How Does It Work?
A SRS Account is opened through the 3 local banks and functions similar to a bank account that does not allow penalty-free withdrawals prior to the statutory retirement age, currently at 62. (according to the IRAS Website as of 5/11/2019) Each individual is only allowed 1 SRS Account at any point in time.
Singaporeans, Singapore Permanent Residents and foreigners are allowed to open the SRS Account as long as they are at least 18 years old, not an undischarged bankrupt, not suffering from mental disorder and is capable of managing themselves and their own affairs. The maximum contribution of a Singaporean/SPR is $15,300 and the maximum contribution for a foreigner is $35,700.
Contributions into the SRS Account has no restriction on the frequency and amount to contribute per deposit as long as it does not exceed the maximum contribution for that calendar year. The cut off date for each calendar year is 31st December. The entitlement for tax relief is for the Year of Assessment as per the year of contribution.
Example of how the tax relief works
This is a very basic example and assumes that there's no other reliefs in place besides the contributions to SRS Account. Let's say John earns an annual income of $80,000. He has no other reliefs claimable so his taxable income is $80,000.
From the above tax bracket image, we can see that his gross tax payable would be $3,350. John decides he would like contribute to his SRS Account to get some tax relief. He deposits $15,300 the maximum of his allowed yearly contribution into his SRS Account. His tax relief would be his SRS contribution hence his taxable income for the year becomes $80,000 - $15,300 = $64,700. This means that his tax payable would be $2,279. This translates to a savings of $1,071 in payable taxes.
Of course this example is very basic. In most cases, there will be other forms of reliefs that people might be eligible for which should be factored in when calculating tax payable. For the types of relief you might be eligible for, visit this link.
What is the SRS Withdrawal Age?
The retirement age for withdrawals of the Supplementary Retirement Scheme follows the statutory retirement age at the point of account opening. In other words, if the statutory retirement age is for example, age 63 when one opens the account, then the penalty free withdrawal age for this person would be when this person turns 63 next time.
Penalty Free Withdrawals
You may be wondering how and when to withdraw money from the Supplementary Retirement Scheme (SRS) account. SRS funds are best withdrawn after the retirement age. Once withdrawal is triggered, you have 10 years to withdraw the funds and the account would be deemed closed. Upon withdrawal, 50% of the funds withdrawn are taxable.
Take for example, if you have accumulated $400,000 at the point of your withdrawal after you are past the retirement age, if you stagger your withdrawal over 10 years, you will be able to withdraw all the money tax free. This might be attractive to some individuals as the $40,000 yearly withdrawal can serve as a form of annual income to pay for retirement expenses. Additionally, they saved on taxes during their working years.
Early Withdrawals
Any amount on withdrawals before the retirement age are subjected to 100% tax and an additional 5% penalty. Thus it's best to only contribute funds that you only need to use during your retirement years.
Can the funds in the SRS Account be invested?
Yes. In fact, you should make the funds work harder for you. Unlike the CPF, funds in the SRS Account only earns 0.05% interest. Hence it's recommended to invest the money to avoid eroding your spending power through inflation. There are 7 options to make your funds work harder for you.
Fixed Deposit
Singapore Savings Bonds
Single Premium Insurance Plans
Unit Trusts
Exchange Traded Funds
Bonds
Shares/REITs
Is it worthwhile to contribute to the SRS Account?
Contributing to the SRS Account helps to provide tax relief. The higher the income tax bracket a person falls into, the more tax savings they get to enjoy.
Sometimes, we may feel that the tax savings appear very little because the dollar value saved looks small like in the example above where John's taxable income is $80,000. The tax savings appears unattractive because it's 'only' $1,071. Yet, if we look at it from a percentage basis, it's actually a guaranteed 7% rate of return from the $15,300 contributed into the SRS Account. If the taxable income is higher, the guaranteed rate of return from the $15,300 contributed based on the income tax rate would be even higher.
On top of this, funds in the SRS Account can be invested. This means that the rate of return from the $15,300 contributed can potentially be tax savings + investment returns.
Summary
The SRS Account is a method to attain some tax relief. Of course given its illiquid nature, you need to be sure you do not need the funds as early withdrawal will subject you to taxes and penalties. It's nevertheless a good instrument if you can afford to set aside the funds for tax relief. Ultimately the funds in the SRS Account is still yours while taxes paid out is sunk cost.
As mentioned, I wrote this article mainly to disseminate information to my clients. Thus this article is really an overview of the SRS Account. There are still information not covered here such as withdrawal fees for foreigners and taxes chargeable to annuities especially after the 10 year window. Thus, it's best to speak to a trusted financial advisor for advise pertaining to your situation. You can also drop me a message.
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Disclaimer: The content created are based on my personal opinions and may not be representative to everyone or any organisation. If you have any doubts or queries pertaining to insurance or investment, please seek professional advice from a trusted adviser in an official setting. You may also reach out to me if you do not have a present adviser using the message box under 'Let's Talk'.
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