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As we are approaching year-end, some Singaporeans are starting to think about how to optimise their tax savings to reduce their taxable income, in a legal way, of course.
One such method is through the use of the Supplementary Retirement Scheme (SRS). The SRS is part of the government’s multi-pronged strategy to help Singaporeans build up savings for our retirement. Unlike CPF contributions, SRS is voluntary.
A key benefit of contributing to our SRS account is to enjoy tax relief. For Singaporeans and PRs, our SRS contributions are eligible for dollar-for-dollar tax relief, up to a maximum of $15,300. For foreigners, the maximum SRS contribution each year is higher at $35,700.
For example, an individual with a taxable income of $100,000 for YA2021 (after accounting for all tax relief) will incur a net tax payable of $5,650. By topping up $10,000 to his SRS account, the tax payable becomes $4,500, saving him $1,150.
This is equivalent to the government giving us a cashback of 11.5% on our SRS top-up. Depending on our tax bracket, this amount could be higher or lower.
Contributing To Our SRS Account Isn’t Enough. We Should Also Invest Our SRS Savings
Unlike funds in our CPF Special Account that earns us a base interest rate of 4.0% per annum (p.a.) – without us having to do anything – the interest rate on our SRS savings earns only a nominal rate of 0.05% p.a. This is certainly not beneficial to our retirement nest, so it is important for us to invest our SRS savings elsewhere to get higher returns.
But how should we be investing our SRS savings?
SRS Withdrawal Rules Needs To Be Considered When We Invest Our SRS Savings
Before investing our SRS savings, we need to recognise why our investment approach may differ compared to how we invest our cash savings.
The main reason for this is due to how SRS withdrawal rules work. Withdrawals from our SRS account are governed by the SRS regulations, and are vastly different from withdrawing from a regular savings account.
For a start, withdrawals from our SRS account are taxable. The good news is that the withdrawals we make upon reaching the statutory retirement age (currently 62) are eligible for a 50% tax concession. Do note that however, there is a 10-year withdrawal period for SRS funds upon the first withdrawal. Once the 10-year withdrawal period is up, the remaining amount (if any) would be considered as being withdrawn in a lump sum upon year 10.
Early withdrawals can also be made before the statutory retirement age but it comes with a 5% penalty on the withdrawal amount. For example, if we withdraw $10,000 before reaching the statutory retirement age, we will incur a penalty of $500. In addition, the full withdrawal amount of $10,000 will be taxed.
It’s worth pointing out that the statutory retirement age for each account holder is based on when our first SRS contribution was made, not what the current statutory retirement age is. So if you made an SRS contribution (even just $1) by 2021, then the retirement age that will apply to you will be 62. By 1 July 2022, the statutory retirement age will increase to 63.
Older SRS Account Holders Closer To The Statutory Retirement Age May Prefer To Take Lower Risk With Their Investments
Let’s take the example of a 60-year-old who already has $350,000 in his SRS account. Given that he is close to his statutory retirement age and is still earning a significant income, the person may see the benefit of topping up his SRS account. In our illustration, an individual with a taxable income of $100,000 will enjoy $1,150 in savings when he makes a $10,000 top-up to his SRS account. This is certainly worth doing, especially since he can start withdrawing from his SRS account in 2 years.
When it comes to investing his SRS, such an individual may prefer to take lower risks with his SRS savings. At age 60, if he were to invest all his SRS savings into a 100% equity portfolio, one of two extreme outcomes may occur.
The first is that, if a recession happens and the market moves against him, he may lose a significant value of his investment portfolio. Being close to the retirement age, it may take years before the portfolio recovers to its original value. This isn’t ideal for someone who is about to enter retirement. If he needs to withdraw from his SRS account to provide for his retirement income, he may have to liquidate his investments at a loss.
Alternatively, the market could do exceptionally well in the next two years and his portfolio would increase in value. If it increases by 50%, his portfolio will be worth about $540,000. Even if he tactfully withdraws $54,000 per year across 10 years, he will still be liable to pay some tax each year on his SRS withdrawal.
This isn’t to say that older people shouldn’t invest in the equity market if they want. If the sum of money we have in our SRS account isn’t high, we can invest in equities in accordance with our age and risk tolerance level. For example, through MoneyOwl Dimensional portfolios, we can choose from 5 different risk levels. The conservative portfolio allocates just 20% of our capital in equities with the remaining 80% in fixed income, suited for those who wish to take a conservative approach towards growing their wealth. At the opposite end of the spectrum, younger investors may prefer a portfolio that allocates 100% of their capital into equities.
However, if we already have a significant amount in our SRS account, it might be better to use cash savings to invest in the equity market rather than our SRS savings. That’s because SRS savings will be considered as taxable income when they are ultimately withdrawn in the future.
For such individuals, investing their SRS savings in low-cost, cash-savings accounts such as the MoneyOwl WiseSaver could be an ideal option. WiseSaver is a fund that invests in Singapore Dollar bank deposits so it’s not only liquid, but extremely safe. This makes it suitable for older SRS account holders who want to grow their savings in a secure, less risky way.
Younger SRS Account Holders Can Afford To Take Higher Risk When Investing
For younger SRS account holders, the investment time horizon we have tends to be longer. Also, while we would generally have lesser SRS savings today to invest, we have time on our side. From an SRS investment point of view, this means that even a small amount today has the potential to grow into a sizeable amount by the time we retire.
As such, it might make financial sense for us to invest in higher-risk portfolios that have the potential to grow our retirement nest egg more quickly as long as it’s in line with our risk tolerance level.
For example, we can consider investing our SRS savings in some of the low-cost portfolios offered by MoneyOwl that are SRS-eligible. These include the MoneyOwl Balanced Portfolio (60% global equities, 40% global bonds) and the MoneyOwl Equity Portfolio (100% global equities).
Assuming we make a $20,000 investment in the MoneyOwl Equity Portfolio at age 45, a 6.7% p.a. return (after fees) could become $73,167 by the time we are 65 (note, this is a projection. Past performance is not an indication of future performance). For younger investors who have a longer investment horizon for their SRS funds, such an investment option may make sense even with a small initial capital.
Buying An Annuity Plan Using Our SRS Savings
Annuity plans or retirement income insurance plans are another valuable option that SRS account holders should not ignore. Annuity plans are insurance policies designed to pay out a stream of income (guaranteed and non-guaranteed) to policyholders so that they can enjoy passive income during retirement.
While we can purchase an annuity plan using cash, there are also good reasons why buying it through our SRS savings might be a viable solution.
Assuming that a retiree, age 70, has been making withdrawals from his SRS account for the past 9 years. However, in spite of making the annual withdrawals, he still has $200,000 in his SRS account. This means that by the end of year 10, any remaining amount would be considered a lump sum withdrawal subject to a 50% tax concession. Even with the 50% tax concession, a taxable income of $100,000 (50% of $200,000) will incur a net tax payable of $5,650.
Some SRS account holders may prefer to purchase an annuity plan, particularly when they are older and not so keen to hold their investments in the form of equities. With an annuity plan, there is greater assurance in the retirement income we can receive as there is a guaranteed component in most annuity plans. Furthermore, some plans offer additional monthly benefits in the event of severe disability to help cover the cost of additional caregiving needs that may be required.
If you are keen to consider purchasing some of these life annuity plans using your SRS savings, MoneyOwl is a platform that you can tap on to consider some of these single-premium retirement income plans.
Read More At MoneyOwl: Best SRS-Approved Single Premium Plans
We want to stress that the various scenarios and investment solutions shared above are a generalised approach towards the different profiles of SRS account holders. However, they don’t apply to every individual.
For example, an individual may have lower SRS savings and be willing to take on a high investment risk as they may have a secure portfolio giving regular dividend income. Such an individual can consider investing in the MoneyOwl WiseIncome portfolio – which invests in a portfolio of global equities, Asian bonds, S-REITS and government securities that provide a blend of stable income and global growth.
Likewise, a younger individual investing aggressively with his cash savings may prefer to take lower risks with his SRS savings that are meant for his retirement nest egg.
At the end of the day, SRS is a tool that we can deploy to help us reduce tax today, while building up our retirement savings for the future. How we choose to use it will depend on our personal circumstances, and the type of investments we are willing to make.
For those of us who are thinking of investing our SRS savings, we can consider investing with MoneyOwl on its suite of SRS-eligible investments. This ranges from its equity-based portfolio to its MoneyOwl WiseSaver cash savings account. We can also purchase annuity plans through MoneyOwl.
You will be glad to know that MoneyOwl is giving up to $200 in eCapitaVouchers when you invest your SRS savings through them.
Here is how much you can redeem based on the amount you invest:
You can invest or find out more about this MoneyOwl SRS promo on their page.