This article was written in collaboration with SGX. All views expressed are the independent opinion of DollarsAndSense.sg
Alongside our CPF accounts, the SRS, short for Supplementary Retirement Scheme, forms part of Singapore’s multi-pronged strategy to address the retirement needs of people in Singapore.
Unlike CPF, where contributions from our salaries are compulsory, contributions made to your SRS account are voluntary. Voluntary contributions made are also eligible for a dollar-for-dollar tax relief of up to $15,300 for Singapore citizens, and $35,700 for foreigners.
If you are intending to open and top-up your SRS account, presumably to enjoy the income tax relief, you should do so before the end of the year. However, you should also be mindful that contributions made to your SRS account, when left un-invested, will earn you a paltry interest rate of just 0.05%.
So you not only need to think about how much contributions you should make to optimise your tax savings, but also how you intend to invest your contributed funds in order to earn a higher return for your retirement.
Here are a few key areas about the SRS that you should understand before you get started.
# 1 How Much Tax Savings Will You Enjoy?
The main reason for topping up your SRS account is to enjoy immediate tax savings. This means that you have to be paying income tax, in order to benefit from the SRS.
By this definition, the higher the income tax bracket you fall within, the higher your tax savings will be on the SRS. Here’s an example of the tax benefits for two individuals contributing to their SRS accounts – Albert and Brent.
Albert earns a monthly salary equivalent to that of the median income in Singapore ($3,792 per month), plus an annual 3-month bonus. His gross annual salary is $56,880.
Brent earns $6,000 per month, plus an annual 3-month bonus. His gross annual salary each year is $113,760.
If we assume both individuals enjoy an ‘earned income’ relief of $1,000, and make the mandatory CPF employee’s contribution, here’s the income tax they will be paying, after taking into account their earned income relief and CPF relief.
|Gross Annual Salary||$56,880||$90,000|
|Income Tax Payable (before SRS Contribution)||$865.28||$2,720|
|Income Tax Payable (After $15,300 SRS Contribution)||$184.08||$1,649|
|Tax Savings From SRS Contribution||$681.20||$1,071|
From the table above, you can see that Brent, being a higher-income earner, is able to enjoy higher income tax savings of $1,071. Albert, who is earning a salary equivalent to the median income in Singapore, is still able to enjoy an income tax savings of $681.20. Both scenarios assume that the individuals contribute the maximum amount allowable of $15,300 to their SRS account
Before topping up your SRS account, you should first calculate how much income tax you are likely to pay for the year. You can use the income tax calculator available from IRAS to help you with this.
# 2 Investments You Intend To Make?
In order to grow this nest egg for your retirement, you should always have the intention of investing your SRS monies to earn a higher interest rate (with the aim to, at least, beat inflation). If you don’t intend to invest, you would have been better off topping up your CPF Special Account instead, which earns you a risk-free interest of at least 4.0% per annum.
Since you need to open an SRS account with one of the three local banks – DBS, UOB, OCBC, there is a perception that there are limited investments that you can make. Some account holder may think that they can only invest in products offered by the bank that they open an SRS account with. This is not true.
Regardless of which bank you choose to open an SRS account with, there will still be a large and diverse range of investment instruments that you can choose from to invest in. These include stocks, bonds, exchange-traded funds (ETFs) and real estate investment trusts (REITs) listed on the Singapore Exchange (SGX).
For example, SRS account holders can invest in any ETFs that are listed on the SGX. These include popular ones such as the SPDR STI ETF, NikkoAM STI ETF, Lion-Phillip S-REIT ETF and the ABF Singapore Bond Index Fund.
This graphic shows some of the benefits of investing in ETFs.
Similar to your cash investments, you should be investing in products that 1) you understand and 2) fits your investment risk appetite. At the end of the day, funds in your SRS account are meant for your retirement and you should only invest in products that you are comfortable with.
# 3 What’s Your Current Age?
SRS account holders are able to start making withdrawals without penalty from their account when they reach the statutory retirement age (currently 62). They also enjoy a 50% tax concession for amount that they withdraw from their account.
Here’s an open secret practised by many financially savvy folks.
Withdrawal made from your SRS account are penalty-free if they take place after the statutory retirement age. This statutory retirement age (which is currently 62) is based on when your first SRS contribution was made.
What this means is that if you open and contribute to your SRS account today, you will be able to withdraw your SRS money at age 62, without any penalty, even if the statutory retirement age were to be raised in the future.
You should also consider your investment horizon, with the statutory retirement age (currently 62) being the timeline for your investments. If you are younger, you can afford to take higher risk with your investments. However, if you are at the tail-end of your career and actively saving up for your retirement, you may want to invest in safer asset classes such as fixed deposits or government bonds.
# 4 Know The Withdrawal Rules And The Penalty For Early Withdrawal
It’s not true that you can’t withdraw your SRS funds if you need to. However, if you do so before the statutory retirement age (currently 62), you may incur a penalty.
For withdrawals made before the statutory retirement age, the full withdrawal amount will be subjected to income tax (100%). In addition, a 5% penalty for premature withdrawal will also be imposed on the sum that you withdraw.
This penalty is only waived under exceptional circumstances.
- Medical Grounds
Full withdrawal of SRS balance can be made by a foreigner provided the following conditions are met:
I. You are neither a Singapore Citizen nor an SPR on the date of withdrawal and for a continuous period of 10 years preceding the date of withdrawal;
II. You have maintained your SRS account for a period of not less than 10 years from the date of your first contribution to your SRS account; and
III. You make a one-time full withdrawal from your SRS account.
Your SRS Monies Is Meant To Be Invested, For Your Retirement
In order to harness the full benefit of the Supplementary Retirement Scheme, you need to not only think about the tax savings that you will enjoy today, but also how you intend to invest your SRS contributions in order to earn higher returns for your retirement.
Investing through the Singapore Exchange is one way to grow the retirement savings in your SRS account. There are many available investments that you can make, each with its own risk-return trade-offs to consider. These include stocks, bonds, ETFs and REITs listed on the Exchange.
Before proceed to invest, remember to first approach your stock broker to get them to link up your stock brokerage account with your SRS account. You will then be able to fund your SGX-investments using your SRS account.
Do note that all profits, dividends and interest payments received from these investments will be deposited back to your SRS account. You are not taxed on them except for amounts which are subsequently withdrawn from the SRS account, when applicable.
To find out more about how you invest your SRS monies via the Singapore Exchange, you can attend SRS-related education events organised by SGX.