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

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

Diversifying the way you save for retirement is usually encouraged, and that’s where the Supplementary Retirement Scheme (SRS) comes in to help you scurry away some money with pretty good additional perks.

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. It’s not surprising since a survey by HSBC found that seven out of 10 people working in Singapore above the age of 45 would like to retire within the next five years.

Early retirement requires major pre-planning and if you are part of the statistics above, you should start as soon as possible. Unfortunately, the DBS-Manulife Retirement Wellness Study done in November 2015 found that people living in Singapore only start planning for their retirement at an average age of 38.

A separate study by Nielsen found 40% of those who have not planned for their retirement said they have not done so due to a lack of understanding of the available options.

There are many ways you can prepare for retirement, and there are as many options as there are levels of risk appetite.

Find out more about the SRS and decide if it’s something for you.

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 start the SRS account

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

  • DBS Group Holdings Ltd
  • Overseas-Chinese Banking Corporation (OCBC) Ltd
  • United Overseas Bank (UOB) Ltd

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. Tax payers 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 and assume that you earn S$80,000 a year and have no other personal tax relief.

Tax payerSRS Contribution (S$)Total Tax Payable (S$)Annual Tax Savings (S$)
With no SRS contribution03,3500
Singaporean or PR8,0002,790560

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. Thus, instead of leaving your SRS to accumulate close to nothing with the market interest rate, you could use the money to purchase financial products for investment.

– 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.

DBS Bank - SRS

Image from DBS Bank

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 are the disadvantages?

One of the cons of the SRS account is that if you withdraw before the retirement age, not only do you have to pay a 5% penalty, all of your withdrawal amount is taxable.

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.

When is a good time to start?

If you want to fully reap the benefits of tax-free income upon retirement and want to bank on the SRS in full, you’re looking at a balance of S$400,000 in your SRS account by the time you retire.

Assuming an average rate of return of 5% per annum over 25 years, you will need to deposit S$680 a month or S$8,160 a year into your SRS account.

There is no hard and fast rule for when to start, but right around your mid-30s could be a good time.

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.

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