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Supplementary Retirement Scheme (SRS) account

by Saiful Haris
coins poured onto desk

Everyone wants to retire either at a young age or when we’re much older but before doing so, we need to start planting the seeds before being able to reap them in the future. One method would be to divest a small amount of your income in Regular Savings Plan like POSB Invest Saver which only requires you to set aside $100 a month. There are other methods as well and in this post, we will be talking about the Supplementary Retirement Scheme aka SRS.

Read: Is the POSB Invest Saver for you?

The SRS is part of the Singapore government’s multi-pronged strategy to assist the population to be financially independent when we’re in our golden years.  Led and operated by Singapore-based banking institutions, SRS allows you to save up for retirement con-currently with the Central Provident Fund (CPF) scheme. As with most financial products, it may not be suitable to everyone.

What is SRS

The SRS was introduced by the Singapore government in 2001 to help its population boost their retirement funds. Unlike CPF, which is involuntary and may only provide you with a decent retirement income, SRS allows you to stash any additional funds to further increase your retirement funds. Additionally, if you have already reached the contribution limit on your CPF account, the SRS is worth considering.

Anyone (Singaporeans, PRs and foreigners) can participate in this scheme voluntarily but:

  • you must be at least 18 years of age
  • not an undischarged bankrupt.
  • you have no existing SRS account with any bank
  • you have no pending SRS Account opening application with any bank

You can contribute varying amounts as many times a year as you like but there is an annual contribution cap of S$15,300 for Singapore Citizens and PRs and S$35,700 for foreigners.

Should you open an SRS account?

If you fall into the higher income brackets, the tax reduction from maxing out the SRS contribution for the year can be significant. For example:

Annual Income
$40k
$80k
$120k
Tax bill without
SRS contribution
$550
$3,350
$7,950
Tax bill after max
SRS contribution
$94
$2,279
$6,191*
Tax Savings
$456
$1,071
$1,760*
Note: Above example assumes that you do not have any tax reliefs. Amount with asterisk are rounded up to the nearest figure

If your annual income is $120,000, then you are able to save up to $1,760 in taxes based on the max contribution of $15,300 contribution to your SRS account. However, if your annual income is $40,000, then you are only saving $456 based on the same contribution amount. This is due to Singapore’s progressive income tax system. Hence, if you fall into the higher income tax brackets, reducing your assessable income translates into greater savings.

If you are looking to open an SRS account, you can do so at any of the 3 SRS operators, DBS, UOB or OCBC via their online banking platform. If you would want to know as to how you can contribute funds to the SRS account, you can do so via online banking or at the branch. You do not need to make a claim in your tax return as it will be done automatically based on information provided by your SRS operator to IRAS.

Benefits of the SRS

The key benefit of SRS is the tax benefits that it offers. Any contribution to SRS is eligible for tax relief of up to S$80,000. One thing to note here is that the interest rate of the SRS account is very low ie 0.05% per annum (which is similar to the base interest rates on most savings account in Singapore) as such, it is better for you to invest the funds in a pool of pre-approved financial products and enjoy tax-free investment gains. Also, by investing the funds, it will help you to stay ahead of the inflation.

Any gains you make on your SRS investments will be credited to your SRS account and are exempted from any income tax until you decide to withdraw the money. There is a caveat. Although the SRS savings can be withdrawn at any time unlike your CPF funds, any withdrawals before the retirement age will incur a 5% penalty and 100% of the amount withdrawn is taxable. For example, if you withdraw $40,000 from your SRS account before the age of 62, you will incur a $2,000 (5%) penalty fee and the full amount of $40,000 will be added to your taxable income for the year.

However, if you decide to withdraw your funds from the SRS account at the statutory retirement age of 62, you will enjoy a 50% tax concession for any amount withdrawn. For example, if you decide to withdraw $40,000 from your SRS account on an annual basis, only $20,000 (50% of $40,000) will considered as taxable income. Additionally, if you have no other source of taxable income at that age, then you are exempted from paying any taxes as the first $20,000 is non-taxable.

Understandably, some of us would not want to withdraw all their SRS funds at one go. That is why the government allows us 10 years to do so. Using the above example, this means that you will not be taxed for withdrawing $40,000 a year over a period of 10 years. That’s $200,000 worth of taxable income which you aren’t paying for.

Year
Amount
Withdrawn
Taxable
Income
Income
Tax
1
$40,000
$20,000
$0
2
$40,000
$20,000
$0
3
$40,000
$20,000
$0
4
$40,000
$20,000
$0
5
$40,000
$20,000
$0
6
$40,000
$20,000
$0
7
$40,000
$20,000
$0
8
$40,000
$20,000
$0
9
$40,000
$20,000
$0
10
$40,000
$20,000
$0
Total
$400,000
$200,000
$0

What are the eligible investment products for your SRS funds?

We’ve mentioned that it is better for you to invest the funds in a pool of pre-approved financial products and enjoy tax-free investment gains.

Here are some of the possible investment options for you:

  • Single premium products (recurrent single premium products, both annuity and non-annuity plans)
  • Life cover (including total and permanent disability benefits)
  • Bonds
  • Singapore Government Securities (SGS)/Singapore Savings Bonds (SSB)
  • Unit Trusts
  • Fixed Deposits
  • Foreign Currency Fixed Deposits
  • Shares
  • ETFs

As listed above, you can see that there are many investment products that you can explore, including bonds, unit trusts, local and foreign currency fixed deposits, single premium insurance, shares and Exchange Traded Funds.

For the conservative investors, consider unit trusts or single premium insurance products, where the overall risks are relatively lower. Even placing funds in a fixed deposit and earning 0.35%-a-year interest could turn out to be a better option than letting your contributions sit idle.

If you are looking for a more diverse investment strategy, you can consider Exchange Traded Funds or REITs. As all investments carry an inherent risk, you should be prudent about what to invest or you can seek professional advice.

Do note that the bank will charge a transaction fee of $2 for each Singapore Savings Bond application and redemption request. Otherwise, all other fees and charges for SRS Account are waived until further notice. Other third-party related charges such as CDP administrative fees will apply.

In conclusion, the unique selling proposition of the SRS is pretty straight-forward ie. letting you save on taxes, invest your funds to grow your retirement savings, and provide you with the flexibility to make withdrawals if needed. This scheme is more useful to you if you are a mid to high-income earner, with a taxable income of $60,000 or more. Although the early withdrawal penalty fee of 5% is not ideal, the benefits of the SRS account far outweigh this.

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