To help us better plan for our retirement in Singapore, we can contribute or top-up to two main retirement plans – CPF and Supplementary Retirement Scheme (SRS).
In addition to CPF contributions from our salary, we can also make additional top-ups to our CPF Special Account (or Retirement Account if we are above 55) via the Retirement Sum Topping Up (RSTU) Scheme.
Unlike our CPF, opening an SRS account is not mandatory. Nevertheless, we get a dollar-for-dollar tax deduction for top-ups to both our CPF Special Account and SRS accounts.
Thus, we arrive at the question asked in the title of the article – which should we choose? There’s really no straight forward answer to say one is better as they serve different purposes. When deciding between the two, here are 7 things we should consider.
#1 Your Nationality
While all Singaporeans and Permanent Residents (PRs) have a CPF account, foreigners here do not.
The good thing is that even foreigners can open an SRS account and start enjoying dollar-for-dollar tax deductions to build their retirement nest egg. Singaporeans and PRs can contribute up to $15,300 a year, while foreigners can contribute up to $35,700 a year, to their SRS accounts.
#2 Are There Any Limits On Tax Savings You Are Eligible For?
For those contributing to their CPF Special Account (SA) via the RSTU scheme, we only receive dollar-for-dollar tax deductions on the first $7,000 each year. We can also receive up to another $7,000 for contributing to our loved one’s Special Account via the RSTU. We can choose to make further top-ups to our Special Account, up to the Full Retirement Sum (FRS), but will not receive any tax relief beyond the first $7,000 each year.
The SRS gives us a dollar-for-dollar tax deduction on top-ups of up to $15,300 ($35,700 for foreigners) a year. This is the maximum we can top-up to our SRS account each year as well.
Unlike topping up our CPF Special Account via the RSTU Scheme, where we do not have to think about taxes and receive payouts through CPF LIFE, we have to pay taxes on the withdrawals on our SRS account after our statutory retirement age (currently 62-years-old). We will receive a 50% tax concession, which means that we only pay taxes on 50% of our withdrawals. For example, if we withdraw $40,000 in the year, we will have to pay taxes on only $20,000 – and we may end up paying no tax if that’s our only taxable income.
Of course, there is a risk that we build taxable income such as investment property rentals for our retirement and may end up paying taxes as well.
Another constraint for the SRS is that we have to make withdrawals within a 10-year period. This means if we have more than $400,000 in our SRS account at the point we start making withdrawals, we may end up paying some tax.
#3 What Can You Do With Your CPF Top-Up And SRS Top-Ups?
When we make RSTU contributions to our Special Account, our top-up funds start earning a minimum of 4% per annum. This means we start earning a relatively decent interest rate from the time we make our top-ups.
While we can invest our CPF Special Account monies, we cannot invest the portion that comes through topping up. This means, if we want the flexibility of investing in stocks or other asset classes, we may want to consider the SRS account.
On the other hand, when we make top-ups to our SRS account, our funds will simply earn a negligible interest rate provided by the bank. This means we must invest our SRS top-up monies in order to earn a good interest rate.
#4 Can You Reverse Your Decision?
While we can’t really reverse our decision in either case, top-ups to our SRS account allow for greater flexibility to do so.
Firstly, there’s no way to change our mind to withdraw funds from our CPF. Period. Even if we are terminally ill, we can only withdraw CPF savings excluding monies put in under the RSTU Scheme.
For our SRS account – if we change our mind, we can withdraw our funds by incurring some penalties. If we choose to make withdrawals from our SRS account before our statutory retirement age, we will have to pay taxes on 100% of our withdrawal amount and incur a 5% penalty on top of that. If we make such withdrawals due to bankruptcy, we will only have to pay income tax on 100% of our withdrawals, without incurring any penalties. If we make such withdrawals due terminal illness (or death), withdrawals of up to $400,000 will be tax-free.
#5 What Happens If You Pass On With Funds In Your CPF Or SRS Accounts?
Funds in our CPF accounts do not make up our estate, hence we need to make a CPF nomination in order to leave behind our CPF monies in the most cost-efficient way (that will also remove any doubts within our family). 100% of our CPF funds are not taxable, regardless of the manner we accumulate it.
As mentioned above, our beneficiaries can withdraw up to $400,000 of our SRS funds tax-free. This implies that an individual would have withdrawn his or her funds in the most tax-efficient manner – $40,000 for 10 years without having additional taxable income. This way, the individual’s taxable income would have been $20,000 and income tax bill would be $0. This amount may be prorated if we started our withdrawals before passing on.
#6 How You Will Be Able To Withdraw Your Top-Up Money?
On CPF, we will likely only be able to see our top-up monies when we turn 65 via the CPF LIFE scheme. We also have the option of leaving our funds in our Retirement Account (funds from our Special Account will flow into our Retirement Account at 55) until age 70 – when we have to start our CPF LIFE payouts. CPF LIFE payouts are not taxable.
On the SRS scheme, there is no retirement payout plan for us. We can just start making cash or investment withdrawals from our statutory retirement age, fixed at the point we first opened our SRS account. Today, the statutory retirement age is 62, but this is set to increase to 65 by about 2030.
On the SRS scheme, there is also no age by which we must start our withdrawals. However, after we start making withdrawals, we should typically withdraw our funds within 10 years. We may choose not to withdraw the entire amount, but any amount not withdrawn after the 10-year period will be subject to 50% income tax in the last year.
#7 How Much Funds Do You Require In Retirement?
On CPF LIFE, we will only receive the payout we are eligible for, based on our retirement sum and the CPF LIFE plan – Standard, Basic or Escalating – that we have selected. There’s no room to withdraw more, but we can put back withdrawals into CPF LIFE if you wish.
On the SRS scheme, we can withdraw as much or as little as we want. We can also adjust the amount yearly as required. We just also have to consider our tax liabilities and the 10-year withdrawal window.
You Can Go Beyond CPF And SRS To Safeguard Your Retirement
Making top-ups to our CPF Special Account and our SRS account are just two ways we can build our retirement nest egg. We do not have to restrict ourselves. We have the choice to set aside more and to explore asset classes outside of what we can invest in on the SRS account.
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