To help us build up a bigger retirement nest egg in Singapore, we can contribute or top-up to 2 main retirement plans – CPF and Supplementary Retirement Scheme (SRS).
In addition to mandatory CPF contributions from our salary, we can also make additional cash top-ups to our CPF Special Account (or Retirement Account if we are above 55) via the Retirement Sum Topping Up (RSTU) Scheme. While we can also make MediSave top-ups, they do not directly translate into a larger retirement pot for our senior years. Similarly, we can make Voluntary Contributions (VC) to our CPF accounts, but these may not be solely for our retirement needs.
Unlike our CPF account, opening an SRS account is not mandatory. Nevertheless, we get a dollar-for-dollar tax deduction for cash top-ups to both our CPF Special Account and SRS account.
Thus, we arrive at the question asked in our title – which should we choose? There’s really no straightforward answer to say one is better as they serve different purposes. When deciding between the two, there are 7 main things we can consider. At the same time, there’s nothing to stop us from choosing both.
#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 How Much You Can Save On Taxes
For those contributing to their CPF Special Account (SA) via the RSTU scheme, we only receive dollar-for-dollar tax deductions on the first $8,000 each year. We can also receive up to another $8,000 for contributing to our loved one’s Special Account via the RSTU. We can always choose to make further top-ups to our Special Account or Retirement Account, up to the Full Retirement Sum (FRS), but will not receive any tax relief beyond the first $8,000.
The SRS gives us a dollar-for-dollar tax deduction on top-ups of up to $15,300 (and $35,700 for foreigners) a year. This is also the maximum we can top-up to our SRS account each year as well.
Besides thinking about taxes when we are making our top-ups, we also need to consider the tax implications when withdrawing our funds to use in retirement.
In our retirement, we will withdraw our CPF top-ups, along with our mandatory contributions, via the CPF LIFE scheme. These monthly payouts are not subject to taxes.
However, we have to pay taxes on the withdrawals of our SRS savings after our statutory retirement age (currently 63-years-old, but will rise to 65 by about 2030). We get a 50% tax concession, which means that we only pay taxes on 50% of our SRS 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 not paying any tax if that’s our only taxable income in the year.
Of course, there is a risk that we build other 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 income tax.
#3 What Can You Do With Your CPF Top-Ups And SRS Top-Ups?
When we make RSTU top-ups to our CPF Special Account or Retirement Account, our top-ups start earning an interest almost immediately – at 4.04% per annum currently. in other words, we start earning a relatively decent interest rate from the moment we make a CPF top-up.
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 investments, we may want to consider topping up our SRS account instead.
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 better return.
We can invest our SRS funds in stocks, mutual funds and unit trusts, fixed-income products such as treasury bills (T-bills) and government securities, Singapore Savings Bonds (SSB) and fixed deposits, and we can also invest via robo-advisory platforms such as Endowus, and StashAway.
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Through Endowus, we can invest our SRS savings in its SRS core advised portfolios that are personalised to meet our long-term financial goals. We can also choose from a wide range of best-in-class single funds that are time-tested and globally diversified.
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#4 Can You Reverse Your Top-Ups?
While we can’t really reverse our decision in either case, top-ups to our SRS account allow for slightly greater flexibility to do so.
Firstly, there’s no way to change our minds to withdraw funds from our CPF. 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 the withdrawal amount. 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 to 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 separate 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 how we accumulated them (i.e. through mandatory contributions, cash top-ups or even government grants).
On the other hand, our SRS funds form part of our estate when we pass on. This means there’s no need or requirement to make a separate nomination for our SRS funds – as it follows our will.
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 – i.e. $40,000 a year for 10 years without having additional taxable income. This way, the individual’s taxable income would have been $20,000 and their income tax bill would be $0. This amount may be prorated if we started our withdrawals before passing on.
#6 When You Will Be Able To Withdraw Your Top-Up Money?
For CPF top-ups, 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.
Via the CPF LIFE scheme, we can also choose whether we want to be on the Standard Plan, Basic Plan or Escalating Plan. The Standard Plan provides a higher level of payout, the Basic Plan provides a lower level of payout but enables us to leave a larger bequest behind when we pass on, and the Escalating Plan provides a payout that increases by about 2% each year.
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 63, but this is set to increase to 65 by about 2030. For those that opened their SRS accounts before 1 July 2022, their statutory retirement age remains at 62. As we mentioned above, we can also make withdrawals from our SRS account before our statutory retirement age by incurring certain penalties.
On the SRS scheme, there is also no age cap for when 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 within 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 we 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 can also invest more on our own outside of these two retirement schemes.
We should also think of our CPF account and SRS account as complementary, rather than fixate on choosing one over the other, especially because there are different restrictions on each account.
This article was first published on 21 December 2020 and updated with the latest information.
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