This article was written in collaboration with UOB. All views expressed are the independent opinion of DollarsAndSense.sg
Retirement planning is an integral part of financial planning in Singapore. This is because retirement plans in Singapore are self-funded, rather than state-funded.
For example, our national life annuity scheme – CPF LIFE, which provides a lifelong monthly payout – works on the basis of how much individuals have contributed to their CPF Retirement Account during their working years.
Besides CPF LIFE, many Singaporeans may also think of relying on their properties to plan for and accumulate a nest egg in their retirement. Some may choose to invest in multiple properties if they have the means, rent out a room when their children move out or even move to a smaller home in order to supplement their income when they retire.
Other than properties, we can consider investing in stocks, exchange-traded funds (ETFs), REITs, bonds and unit trusts or buying life insurance products. Did you also know that we can actually purchase investment or insurance products for our retirement while enjoying immediate tax savings today?
What Is The SRS?
The Supplementary Retirement Scheme, also known as the SRS, is part of the government’s multi-pronged strategy to address the retirement needs of people in Singapore. While CPF contributions are compulsory, contribution to the SRS is voluntary.
Contributions that are made to our SRS account should primarily be for the purpose of our retirement. They can be withdrawn, without penalty, to provide us with an additional source of income once we have reached the statutory retirement age. Currently, this is at age 62.
Unlike funds in our CPF accounts which earn us a risk-free interest of between 2.5% and 5%, contributions made to our SRS accounts only generate a nominal interest of 0.05% per annum.
However, the major advantage SRS offers lies in the tax benefits it offers. Voluntary contributions made to your SRS account are eligible for a dollar-for-dollar tax relief. The annual SRS contribution cap is currently set at S$15,300 for Singapore citizens and permanent residents, and S$35,700 for foreigners.
According to The Straits Times, there are a total of 127,753 SRS account holders in Singapore. This means that the majority of workers in Singapore still do not have an SRS account, even though a significant group of them may actually benefit from the use of one. These could be because some may have the misconception that SRS is only for high income earners, or that tax savings they enjoy would be minimal.
In this article, we hope to debunk some of these misconceptions that people have about the SRS and to explain how this scheme can potentially help us in our retirement planning journey.
Misconception 1: SRS Is Only For High Income Earners
There is a perception that the SRS is only useful for high income earners. To some extent, this is true since high income earners pay the most tax and hence, are able to save the most on their income tax when they contribute to their SRS. However, we should not ignore the fact that it can also be useful for those of us who are earning a salary which is closer to the median income range in Singapore.
For example, if we currently earn the median income salary in Singapore (S$3,617 per month), plus an annual 3-month bonus, our gross annual salary will be S$54,255.
If we assume the only personal tax relief that we receive is the ‘earned income’ relief of S$1,000 and our mandatory CPF employee’s contribution, our chargeable income would be S$42,404. This means we will pay an income tax of S$718.28 based on Year Of Assessment (YA) 2018.
If we intend to set aside funds for our retirement, we can choose to make a voluntary contribution to our SRS account.
Let’s assume we contribute S$10,000. With that, our chargeable income falls by S$10,000 to S$32,404. Our income tax is reduced by almost two-thirds to S$284.14, giving us an immediate tax saving of about S$434. If you think about it, this is like enjoying an immediate one-time yield of 4.3% (S$434/S$10,000).
|No Contribution To SRS Account||Contribution To SRS Account|
|Income Tax Payable||S$718.28||S$284.14|
Misconception 2: We Must Choose Between CPF Cash Top-Up Or SRS Contribution
Contributing to our CPF Cash Top-up allows us to enjoy tax relief of up to S$7,000 each year. Contributing to our SRS account allows us to enjoy tax relief of up to S$15,300 each year.
Some people may think that they should choose one over the other. That’s not true. If we want, we can choose to utilise both schemes in order to enjoy a maximum tax relief of up to S$22,300 each year, from these two schemes. (Do note that this is still subject to the personal income tax relief cap, which is S$80,000 in YA2018.)
We are not saying this is what you should do. If your annual salary is S$54,255, chances are that you will still need to spend a significant part of your income to fund your living expenses and other necessities in life. However, if you are able to top-up such an amount, you will be able to enjoy significant savings on your income tax.
Young professionals who do not yet have children will find these top-ups useful for them while they are young. Moreover, as they are still young, the money which they have set aside for their retirement, be it through their CPF or SRS account, will have a longer time to grow and compound itself.
Misconception 3: There Are Limited Products We Can Invest In
Similar to deposits in a regular savings account, contributions which are left unused in our SRS account will only earn us an interest of just 0.05% p.a. This means if we want to enjoy higher returns, or at least beat inflation, we should strive to invest the contributed funds. According to a Straits Times article in 2017, about 34% of SRS contributions are left uninvested.
One perception people have is that there are significant limitations when it comes to what you can invest your SRS monies in. This isn’t true. By and large, most common investments that we would like to make for our retirement can be funded using our SRS account.
For example, our SRS funds can be used to invest in stocks, ETFs, REITs and bonds. If we prefer investing through a fund management company, we can channel our monies to unit trusts. We can also choose to invest in retirement-related insurance products that provide a combination of guaranteed and non-guaranteed returns, or simply leave it in a fixed deposit to earn higher interest of 1% or more. Going forward, Singaporeans may soon be able to invest in the Singapore Savings Bonds via our SRS account. The government is currently working on this and a further announcement will be made when it’s ready.
Do note that, unlike cash, not every investment product can be funded using our SRS account. For example, direct property investments are not allowed to be made using funds from our SRS account.
To maximise the returns from your SRS account, you should 1) not only look to enjoy immediate tax savings, but also 2) aim to generate a higher return for your contributed funds beyond 0.05%.
Misconception 4: SRS Is Administered By CPF
Since it’s meant for our retirement, some people mistakenly think that the SRS is part of the CPF scheme. It’s not.
Though they serve similar purposes – helping people plan for their retirement in Singapore – the CPF and the SRS schemes are entirely separate schemes. CPF is a compulsory scheme for all Singaporeans and PRs while the SRS is purely voluntary, and both locals and foreigners are eligible for it.
The SRS is administered by Singapore’s three local banks, including United Overseas Bank (UOB).
It’s important to note that these banks are operators of the SRS and not fund managers. This means they do not direct where your SRS contributions should be invested. Account holders are responsible and have the full discretion of deciding how they want their SRS monies to be invested. These investments must be SRS-approved.
Contribute To Your SRS Account Before Year-End To Enjoy Tax Relief
Assessment of income tax is done within a calendar year. This means that if you want to enjoy tax relief in 2019, you need to contribute to your SRS account before 31 December 2018. There is no need to make any investment immediately to enjoy this tax relief.
From now till 31 December 2018, UOB is giving away treats if you contribute to your UOB-SRS account and make a contribution to it. You will also receive treats for using your SRS funds to invest in unit trusts or insurance with UOB.
UOB also has a simple SRS tax saving calculator, where you can find out exactly how much tax savings you will enjoy based on your annual income, tax relief and the amount you intend to contribute to your SRS account with a simple click of the mouse.
So, go ahead and calculate for yourself how much tax you could potentially save. You can sign up for an UOB SRS Account at any UOB branch today.