The most common questions I receive every year-end are related to the Supplementary Retirement Scheme (“SRS”) – how does it benefit them, and if I would recommend them to contribute to SRS. To which, I would usually reply “It depends”.
And they are often surprised by my answer, because all that they have heard from their bankers are why they should contribute to their SRS (cue some sales pitches about the products they should buy with their SRS monies).
Now, don’t get me wrong, I am not against it – the Supplementary Retirement Scheme is a useful tax saving tool. Perhaps let me share more in this article about the purpose of SRS, how it helps with income tax, what you can use your SRS savings for, and what do I mean by “It depends”.
What is SRS?
SRS is a voluntary contribution retirement scheme that defers tax for people who contribute to the scheme. Singaporeans/PRs and foreigners who are working in Singapore may contribute up to the limits of $15,300 and $35,700 respectively into their SRS accounts and earn dollar-for-dollar income tax relief for the year.
The good thing is, at or after the statutory retirement age, only 50% of the amount withdrawn will be subjected to tax. This is known as “50% tax concession”. Once the first withdrawal is made at or after the statutory retirement age, the entire amount in SRS must be withdrawn within 10 years.
The statutory retirement age is the prevailing retirement age when the first contribution is made, which as of now is 62. Hence, if you would like to secure that, you could make a small contribution to your Supplementary Retirement Scheme account first.
Supplementary Retirement Scheme Benefit: Income Tax Relief
To illustrate how SRS reduces the income tax payable for the year of contribution, let’s look at the following table:
If you noticed, higher income earners enjoy much higher tax benefits when they contribute to their Supplementary Retirement Scheme.
A 40-year-old senior technical consultant who has a chargeable income (annual income less all reliefs) of $240,000 would enjoy a tax savings of $2,907 after contributing $15,300 to his/her SRS account. If he continues contributing for 20 years, he will receive a total tax savings of $58,140, which is not bad at all!
Do note that the maximum relief per year is currently capped at $80,000. If your reliefs have already reached the ceiling, you will receive no tax benefits from contributing to your SRS that year.
Withdrawal of SRS Money – During Retirement!
Because SRS’s main purpose is for retirement, the scheme comes with rules that discourage early withdrawal of monies. Withdrawal can be done at any age, but only withdrawals made at or after the statutory retirement age enjoy a 50% tax concession.
In fact, early withdrawal attracts a 5% penalty on the amount withdrawn, and the amount is fully subjected to tax. And yes, it will count towards your total chargeable income for the year.
Okay, What Can I Use My SRS Savings For?
The monies in your SRS account can be used for a number of investment options such as investing into ETFs, unit trusts and even annuities. If you would like to understand more about your SRS options, you can drop me a message here.
Don’t Leave Your SRS Money Idle in the Bank
Not doing anything with your SRS money is also one of the options, but don’t do that lah. The interest rate is only a paltry 0.05% per annum!
According to a 2016 survey, a whopping $2.38 billion is sitting in SRS bank accounts earning puny interest. In general, we leave our money in the bank because we want easy access to it. But if the money must be committed for the long term, why not get a higher return with it?
Erm, So Why “It Depends” leh?
Generally, the decision of whether to contribute to SRS (and invest) lies in knowing if we will end up with more or less money if we do contribute. Let’s take a look at the following example to understand better.
Consider the case of a young 30-year-old IT manager, Alfred, whose marginal tax rate is 7%. Prudent by nature, he has a fair amount of savings per year to invest. He was recently introduced to SRS through his banker and is excited about having more money (from the tax savings) to invest. But, he has also heard how he may end up being worse off and is cautious about SRS.
Currently, he has $14,229 per year to invest. If he contributes to SRS, he would have $15,300 ($14,229 + $1,071 tax saved from contributing to SRS) to invest. In both options, he is looking to invest in a fund that gives him 7% per year. For simplicity sake, we will assume that (1) his marginal tax rate throughout is 7%, and (2) he does achieve his desired investment return.
Alfred Wonders if He Should Contribute to SRS?
In scenario A, his funds would have grown to $1,804,381 pre-tax at age 62. He intends to withdraw this amount over 10 years to fully enjoy the tax concession. This works out to be $180,438 per year. Of this amount, 50% (or $90,219) is taxable and the tax payable is $4,525. Over 10 years, the total amount he withdrew is $1,759,130 (after paying tax).
In scenario B, his funds would have grown to $1,678,074, which is not subjected to any tax. And yet, he still ends up with $81,056 less.
Hey looks not bad right? Alfred ends up with more money if he contributes to SRS. With such results, of course the banker encouraged him to contribute to SRS.
But Alfred decided to seek a second opinion from his financial planner who told him:
No Alfred, don’t contribute to SRS now.
In the above scenario, we had also assumed prevailing income tax rates during retirement years. But we can never be certain if tax rate will remain the same. Likely, it would not and it will increase, especially at the higher income tax bracket. Any increase in the income tax during retirement will affect the outcome negatively.
At just $81,056 or 4.6% more for contributing to SRS, it just does not make sense for Alfred to contribute to SRS and bear the risk of increased tax. So no, Alfred should not contribute to his SRS, at least not now.
So When Should Alfred Contribute to SRS?
Shortly after, Alfred left his job and started his own IT systems company. He worked very hard on his business and achieved much success 3 years later. Then, he decided to revisit the issue of SRS again since his salary is considerably higher now.
This time round, his income is in the 20% marginal tax bracket. He also decided he wants to retire at age 65.
At 20% tax bracket, Alfred’s tax savings is $3,060 if he contributes to SRS. If he doesn’t contribute, he would only have $12,240 ($15,300 – $3,060) to invest. In this case, by contributing to SRS, Alfred will have $315,625 or 18% more. This is 4 times higher than previously with more buffer for future tax increase.
Read Ministry of Finance’s FAQ to find out more.
Wow, So It Really Depends. What else should I consider?
If we look at Alfred’s scenario again, we can observe that the issue is complex. The outcome is dependent on many factors including:
- Marginal tax rate during contribution years
- Age of contribution and age of withdrawal
- The amount of contribution
- Investment rate of return
- Applicable marginal income tax rate during retirement years
- Over how long a period is the retirement amount going to be withdrawn
Everyone’s circumstances is different and it is best that you consult your financial planner on the optimal parameters for SRS. Further, your SRS plans should fit your current financial circumstance and your overall retirement plan!
And remember, you should not jump into getting any product that has been strongly recommended by your banker.
If you would like
- a financial review to decide if it would make sense for you to contribute SRS
- to find out more about SRS products for your retirement plans
I will be happy to share with you – just drop me a note at the message box below 🙂
Note: Author is a financial planner with one of the largest independent financial advisory firm that partners with most of the insurers in Singapore.