Boost Your Retirement Fund With The Supplementary Retirement Scheme (SRS)

Boost Your Retirement Fund With The Supplementary Retirement Scheme (SRS)

If you live in Singapore, you’ve probably heard a gazillion times that it’s never too early to start planning and saving for retirement.

Take it from those with experience: 40% of retirees polled in HSBC’s The Future of Retirement study wish they had started saving for retirement at an earlier age. Worryingly, almost a quarter of working-age people in the same study said that they had not started saving for their retirement.

If you belong to the latter camp, you’ll want to know about the Supplementary Retirement Scheme (SRS), which could help you boost your retirement savings with additional perks to boot.

What is the SRS?

The Supplementary Retirement Scheme is a scheme available to Singaporeans and residents to help them save for retirement. This is a supplement to the Central Provident Fund (CPF), but is completely voluntary.

You can decide how much you want to contribute to the SRS, though there is a cap. The money is meant for retirement, and you can use it to buy various investment instruments.

How to open an SRS account

You can open an SRS account by contacting any of the three banks below.

What are the benefits of SRS?

The SRS has unique features that make it attractive for most Singaporeans.

i) Tax relief

One of the biggest advantages of the SRS is the eligibility for tax relief. Taxpayers in Singapore get a total of S$80,000 of tax relief in Year of Assessment 2018, which means any SRS contributions made from January 1, 2017 will be part of the S$80,000 relief.

For those who don’t really get any income tax relief, the SRS is a good way to save for retirement while reducing your income tax.

The maximum amount that you can contribute a year as a Singaporean or Permanent Resident (PR) is S$15,300, and S$35,700 as a foreigner. For those who simply want a straightforward way to save for retirement, or are looking for something to supplement their investments and savings, the SRS is a viable option.

To get a basic idea of how much tax savings you can enjoy by contributing to SRS, let’s use the example below. Assuming you are a Singaporean or Singaporean permanent resident, and you earn S$80,000 a year and have no other personal tax relief, here are your estimated tax savings:

 Without SRSWith SRS
SRS contribution (S$)015,300
Chargeable income (S$)80,00064,700
Payable tax (S$)3,3502,279
Tax savings (S$)-1,071 (32% savings)

ii) SRS can be used for investment purposes and investment returns are tax-free

One important thing to remember is that the SRS account does not benefit from the relatively high interest rate of the CPF account. If you do not invest your SRS funds, they grow at a measly 0.05% interest rate per annum. That’s a grand total of S$7.65 in interest accumulated if you invest S$15,300.

Instead of leaving your SRS funds to accumulate at a snail’s pace, you could use the money to invest in the following:

  • Insurance
  • Fixed Deposits
  • Shares listed on the Singapore Exchange
  • Unit Trusts
  • Bonds

Your returns are deposited into your SRS account and are tax-free.

iii) When you withdraw from your SRS account, only 50% of the withdrawals are taxable

You may withdraw from your SRS account at retirement age and when you do, only 50% of your withdrawal is taxable.

Assuming that income tax rates do not change by the time you retire, this means that you can withdraw up to S$40,000 a year without paying tax.

From the moment you withdraw from the SRS account upon retirement age, you have 10 years to fully withdraw your funds.

This gives you 10 years of tax-free income, and in this time, your CPF money can continue to accumulate greater interest.

What is the maximum SRS contribution?

You can contribute any amount to your SRS, as long as it is within the contribution cap. Here is the maximum you can contribute to your SRS every year:

  • Singaporeans / Singapore permanent residents: S$15,300
  • Foreigners: S$35,700

When can you make an SRS withdrawal?

You can make a withdrawal anytime.

However, if you withdraw before the statutory retirement age of 62, 100% of your withdrawal amount will be taxable, and you will also have to pay a 5% penalty.

On the other hand, once you hit 62, you will only be taxed on 50% of the withdrawal amount.

What are the disadvantages?

One of the cons of the SRS account is the withdrawal penalty before the retirement age.

The only time when you can escape the penalty is if you are withdrawing on exceptional grounds such as for medical reasons, death, or bankruptcy. If you’re a foreigner, you can withdraw the whole amount without paying penalty provided you have kept the account for at least 10 years since your first deposit.

What this means is that the money you stash away in the SRS should be strictly viewed as long-term funds, and thus you shouldn’t be in a hurry to deposit as much as possible into the SRS, especially if you are relatively young and are able to explore other investment options or have upcoming major financial commitments.

Another disadvantage is that uninvested funds accrue at an extremely low interest rate of 0.05% every year – that’s not enough to even beat inflation. As of December 2017, 33% of SRS contributions nationwide are uninvested. To truly reap the benefits of your SRS account, you would have to invest your SRS contributions.

When is a good time to start?

There is no hard and fast rule for when to start, but right around your mid-30s could be a good time. The earlier you start, you more years you allow for your money to compound.

All in all, the SRS is a good supplement that not only helps you to save for the long term, but also helps you to save on income tax both when you’re contributing and when you’re withdrawing.

This article was originally published on September 8, 2017.
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