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The end of year period is when many of us would look to optimise tax savings. One such method is through the Supplementary Retirement Scheme (SRS). The Supplementary Retirement Scheme is part of the government’s multi-pronged strategy to help Singaporeans build up savings for our retirement. Unlike CPF contributions from our salary, contributions to our SRS account are voluntary.
The main reason to top up our SRS account is to enjoy dollar-for-dollar tax relief, up to a maximum of $15,300 for Singaporeans and Permanent Residents (PRs), and $35,700 for foreigners working in Singapore. The end-of-year period is also when some financial institutions may also offer attractive promotions if you invest SRS funds through them.
Since the SRS is meant to provide us with retirement income during our golden years, there are withdrawal rules that we need to take note of.
If we withdraw funds from our SRS account before the statutory retirement age (currently 62), the full withdrawal amount will be subject to income tax. In addition, there will also be a 5% penalty on the withdrawal amount. For example, if we withdraw $40,000, there will be a penalty of $2,000 (5%) that we will pay.
If a withdrawal is made before the statutory retirement age due to death or medical grounds, 50% of the withdrawal amount will be subject to income tax. If the withdrawal is made before the statutory retirement age due to bankruptcy, 100% of the withdrawal amount will be subject to income tax. In all of these cases, there will be no 5% penalty payable.
If we make withdrawals after reaching the statutory retirement age, we will receive a 50% tax concession on our withdrawal amount. For example, if we withdraw $40,000 from our SRS account for the year, only $20,000 will be considered as taxable income. Also, there will be no penalty imposed on our withdrawal amount.
Besides understanding the SRS withdrawal rules, we also need to understand some other areas pertaining to the SRS.
#1 How Much Tax Relief We Enjoy Depends On The Income Tax Bracket We Are In
Singapore practices a progressive tax system. This means that the personal income tax rate increases as the taxable income increases. For those who need to pay personal income tax, the tax rate can be as little as 2% to as high as 22%.
For example, an individual with a chargeable income of $80,000 will pay $3,350 in income tax. In contrast, a person with a chargeable income of $40,000 will pay $550, which is about six times lower.
|Chargeable Income||Income Tax Rate (%)||Tax Payable For Chargeable Income Of $80,000||Tax Payable For Chargeable Income Of $40,000|
($0 to $20,000)
($20,001 to $30,000)
($30,001 to $40,000)
($40,001 to $80,000)
|Total Amount Payable||$3,350||$550|
If both individuals contribute $5,000 to their SRS account, the person with the higher chargeable income of $80,000 will enjoy a tax savings of $350. The person with the lower chargeable income of $40,000 will enjoy a tax savings of $175 since the person is in a lower tax bracket.
Before contributing to our SRS account, it’s important to first know which tax bracket we fall within. This will determine how much tax savings we enjoy if we contribute to our SRS account for the year. The higher the tax savings, the greater the motivation to contribute to our SRS account.
#2 We Should Seek to Invest Our SRS Monies
Unlike funds in our CPF accounts that earn us a risk-free return of between 2.5% to 6.0% per annum (p.a.), funds in our SRS account will only earn us a nominal interest rate of 0.05% p.a., which is obviously not good enough.
Unless you are close to retirement (e.g. you are 61 this year and intend to withdraw the money next year), it makes sense to invest our SRS monies to ensure that it earns higher returns. This is especially true if we still have a long-time horizon to our retirement.
For example, a person who is 42 this year will still have 20 years before they will start making withdrawals from their SRS account. This gives them sufficient time to invest and earn a higher return in the financial markets while being able to ride out market volatility.
#3 We Don’t Need to Invest Through the Agent Bank We Open an SRS Account With
Similar to the CPF Investment Scheme (CPFIS), we will need to open an SRS account with one of the three local banks in Singapore – DBS; OCBC; UOB. We can only hold one SRS account at any point in time. If we have opened an SRS account with one of the agent banks and wish to switch to another bank, we can do so.
It’s important to note that the responsibility of the agent banks is to hold the SRS monies on our behalf in accordance with the laws that govern it. The agent banks do not invest nor manage any of the funds in our SRS account for us. Funds in our SRS account can only be invested or withdrawn as per our instruction.
One misconception is that we can only invest with the agent bank that we open an SRS account with. This isn’t true. Any SRS-approved investments can be made through our SRS account, regardless of which agent bank we open an SRS account with.
For example, whether we open an SRS account with DBS, OCBC or UOB, we can still invest our SRS savings through a platform such as MoneyOwl. The agent bank you open your SRS account with does not restrict you from any SRS-eligible investments you wish to make.
From now till 31 December 2020, MoneyOwl has an SRS Promo where you can get up to $200 worth of eCapitaVouchers if you invest your SRS savings through them.
#4 Types of Investments We Can Make
While we can’t use our SRS monies to invest in a property, overseas stocks or commodities, there are still multiple investments that we can make using our SRS account.
For example, there are many stocks, REITs, ETFs and bonds listed on the Singapore Exchange (SGX) that we can invest in using our SRS monies. If we prefer to gain exposure to overseas markets, we can consider investing our SRS monies via unit trusts such as those offered by MoneyOwl. This will allow us to gain exposure to a wide range of globally diversified stocks and bonds. As always, the level of risk we are willing and able to take on will determine our investment portfolio’s asset allocation.
Those who prefer an instrument that can provide us with regular income streams during our retirement can consider getting a retirement income insurance plan using our SRS savings. Such plans are designed to provide us with a steady stream of regular income (guaranteed + non-guaranteed) during our retirement years and are an excellent complement to our CPF LIFE payouts. You can find out more about such SRS-approved retirement plans with MoneyOwl.
When it comes to our SRS investments, we should ideally be investing based on a long-term investment strategy, and in assets that we are comfortable with. After all, the investments we made via our SRS savings are clearly earmarked for our retirement. This falls nicely in line with MoneyOwl’s investment philosophy which focuses on generating returns to achieve your long-term financial goals.
To be clear, whether we use our SRS money to invest in unit trusts and retirement income insurance plans, or prefer funding them using cash, the investment products that we are getting are the same. The key difference is that by using our SRS account, we get to enjoy immediate tax savings, on top of the returns that we can get from these investments.
#5 The Statutory Retirement Age When We Can Start Making Penalty-Free Withdrawals Is Based On When Your First SRS Contribution Was Made
As stated in point 1, SRS account holders can make penalty-free withdrawals from their accounts when they reach the statutory retirement age (currently 62). They also enjoy a 50% tax concession for the amount that they withdraw from their accounts.
What fewer people know is that the statutory retirement age is based on when your first SRS contribution was made.
As announced in last year’s National Day Rally, the statutory retirement age will increase to 63 in 2022, and eventually move up to 65 by 2030. So if you want to make a penalty-free withdrawal from 62, it might be logical to open and contribute to your SRS account soon, before the statutory retirement age increases.
Invest Your SRS Funds Through MoneyOwl And Get Up To $200 eCapitaVouchers
If you are intending to contribute to your SRS account and would like to invest your money in an eligible unit trust or retirement income insurance plan, you will be glad to know that MoneyOwl is giving up to $200 in eCapitaVouchers when you invest your SRS funds through them.
Here is how much you can redeem based on the amount you invest:
|SRS Funds Invested with MoneyOwl||Shopping Vouchers|
|$1,000 to $10,000 fresh funds invested OR;||$50|
|$10,001 to $50,000 fresh funds invested OR;||$100|
|$50,001 and above fresh funds invested||$200|
Do note that only first-time Moneyowl customers are eligible to redeem for vouchers in the first tier (between $1,000 to $10,000).
*Terms & conditions apply.
Whether we are just starting in our career, or about to approach our golden years, the Supplementary Retirement Scheme (SRS) is a great way to enjoy tax savings while still ensuring that we aside money for our future retirement. By investing our SRS contributions, we also ensure that our retirement money is working hard for us.