If you’ve been planning for your retirement, you’d probably know that CPF Life’s monthly payouts might be insufficient for you to sustain the lifestyle you’d like.
You look for ways to boost your savings and hear about your friends talking to you about saving their income in their SRS accounts.
Here’s what you need to know about SRS and how it can help you with your retirement savings.
What is the Supplementary Retirement Scheme (SRS)?
SRS is a savings program that you can voluntarily join that will increase your savings before reaching the official retirement age.
This scheme was designed and introduced by the government to help you get ready for retirement in advance.
Maybe you think that you already have your CPF since it fits the meaning of a retirement plan. But the CPF is a mandatory saving scheme that is designed to give retirees a standard income after their retirement.
Your CPF may not be sufficient if you want to spend on additional luxuries.
To add to the fact that CPF is not really enough, lots of parents use up their CPF funds to purchase homes and finance their children’s education, which is not ideal for your retirement savings.
Let’s not forget that when you retire, the cost of living increases.
This is where the Supplementary Retirement Scheme comes to the rescue. To simply put it, an SRS is an additional account where you can deposit your retirement savings for the long run.
But Why Would I Open an SRS Account?
Good question – especially since you can open a normal savings account. The main advantage of SRS is the tax benefits that it offers. Deposits are totally disregarded from your tax billings annually.
This means that you’ll have higher tax savings if you are in a higher tax bracket.
Also, compared to your CPF, you can take the money out from your SRS account at any time of the year. However, an early withdrawal before the official retirement age (currently 62) will result in a 5% reduction and the amount withdrawn is subject to tax.
Despite this, it’s good to know that there’s still liquidity offered to you unlike getting an annuity plan.
So, if you haven’t hit your retirement age, would like the liquidity offered, and reduce your tax payments, SRS is an attractive option.
How Can You Save With Tax Relief From SRS?
Applying for the Supplementary Retirement Scheme would typically mean that you, as a taxpayer, would want to decrease your tax liabilities.
If you are earning more than $40,000 in a year, you can potentially see large savings over time as there’s a huge jump in the tax rates.
Here is a table that illustrates how much you can potentially save on taxes:
|Less: Personal Reliefs (CPF, Qualifying Child, Parent, Earned Income, etc)||S$31,500|
|Without SRS||With SRS|
|Potential Tax Savings||S$1,071 (You get to save 40% more tax in the year)|
How to Open an SRS account?
You have the option of choosing UOB, DBS, or OCBC for opening an SRS account. After this, you can contact your bank and select the amount of money you wish to put in your account.
Besides the option to register online, you can also walk into one of the banks with the necessary documents. Depositing to an SRS account is similar to any form of deposit in a standard bank.
You can also use your mobile phone app to deposit your funds through internet banking. They accept cheques if you go in person.
Advantages of SRS
Extra retirement savings
We all know that retirement is a really important consideration in our lives. Essentially, we all need a certain degree of funds to enable us to live for decades without work.
Thus, it is necessary to keep in mind when we prepare for retirement to ask if your CPF, property, and cash on hand will be enough for a comfortable retired life?
All those assets mentioned above won’t be enough for most people to cover their bills throughout retirement fully, and for those who intend to go on lovely adventures and travel around the world, you’ll definitely need more savings to do so!
Instant and Continuing Tax Savings
Again, one of the most significant benefits of the Supplementary Retirement Scheme is tax relief.
Every year, Singaporeans can save up to a maximum of S$15,300 in their SRS accounts. This amount is S$35,700 yearly for foreigners. This means that this is the amount that won’t be added to your taxable income!
Take note that when the funds are withdrawn immediately or after the retirement age is reached, 50% of the total amount withdrawn is subjected to tax.
For instance, if an amount of S$40,000 (maximum withdrawal per year) is withdrawn in a 12-month period, then it means S$20,000 is subjected to tax.
If you don’t have any other source of personal income, this would be tax-free as the first S$20,000 of personal earnings in Singapore is not taxed.
Currently, earnings and salaries are liable for taxation from S$20,000.
This means, in case one does not possess any alternate taxable source of earnings and revenue, one can draw out an amount up to S$40,000 yearly, without any tax from your Supplementary Retirement Scheme accounts for the next 10 years.
Thus, the logical method is to somehow minimise income taxes during the period of the 10 years by expanding the withdrawals in the case of no alternate source of income or by drawing out fewer amounts in the coming months if you acquire extra income.
Disadvantages of SRS
Penalty for Early Withdrawal
Despite offering you the ability to withdraw should you need it, there is a 5% reduction should you withdraw it before the official retirement age. This means that you should only save what you know you can afford to put aside so that you don’t incur these fees unnecessarily.
Although this might not affect most Singaporeans, but if you’re an individual who would like to withdraw an annual income of more than $40,000, I’m afraid that’s the limit every year.
You would need to look at other sources of savings to finance your retirement income – such as annuity plans.
Investing with your SRS Account
To your benefit, the government allows you to invest the funds in your SRS account in order to grow your savings.
However, you can only invest your funds in government-approved listings like:
- Index Funds
- Singapore Savings Bonds
- Blue Chip Shares
- Unit Trusts
- Endowment Insurance Plans
- SGD Fixed Deposits
The investments can vary from the products which the bank administers to its customers. These investment options are offered by third-party fund managers.
By contacting the fund manager, you may also find out about other investment options besides the distributed options.
Here’s a list of SRS investment and insurance options that you have.
Investing is a great idea if you do not want your money to lose its value to inflation. You can also seek consultation from your bank if you would like to get in-depth knowledge on how to effectively make use of your funds.
Should you invest your SRS contributions?
To answer straight up, yes, it is a good idea to invest your SRS contributions.
Opening an SRS account is a long-term decision and shouldn’t be taken lightly. This means that you should try to see things for your future.
When you open your SRS account, you do not have the ability to withdraw any form of money if you are not in the retirement age group.
If you choose to withdraw, there will be a 5% deduction, which will be huge if you look at it in the long term aspect.
Investing for the future allows you to maximise your funds and will result in you making the most out of your contributions.
Furthermore, the annual interest rate for SRS accounts is only 0.05%. This means that your funds could lose their value over the years to inflation. This should be enough reason for you to invest your funds and not leave it stagnant.
Withdrawing from your SRS account
If you reach your statutory retirement age, you can request a withdrawal. Remember that you will be taxed half of the withdrawal amount.
As mentioned a few times previously, if you wish to withdraw before you hit your retirement age, there will be a 5% penalty to pay.
Additionally, you’ll be required to pay taxes on the total amount which you have withdrawn. The amount will be logged into your taxable income for your annual tax liabilities.
Should you possess a Supplementary Retirement Scheme account?
There are some factors to consider before you give a final verdict on whether you should have an SRS account.
What is your annual income?
If you have a pay scale that is higher than the average citizen, you should consider having an SRS account. This is because a person with higher income can get the highest amount of tax benefits.
Do you need the money immediately?
If you can assure yourself that you will not withdraw any form of funds before you reach the statutory retirement age, then having an SRS account is not a bad idea. You should also be sure to have liquidity from other sources.
An example would be to have other liquid investments and also have a 6-12 month emergency fund.
How long will you be in Singapore?
If you are not from Singapore and just residing, you should be sure to look into your medium and long term plans since you would definitely have to keep the funds for over a decade.
Additional Information Regarding SRS
- You can invest your funds with another bank even if your SRS account is owned by another bank.
- You can check your SRS account balance by logging in to your digital account. This includes your cash balance, your contribution limitations, total deposits to date, and other contribution amounts.
- You can only have a single SRS account as a permanent resident of Singapore. Having multiple SRS accounts for a single person may lead to penalties and fines.
- You can transfer your SRS account from one bank to another by filling up a transfer form and declaring your wish to transfer to another bank.
- The Supplementary Retirement Scheme is not linked or related to your CPF. SRS is totally voluntary in contrast to a CPF.
- You cannot transfer funds from your CPF to your SRS.
- You can continue to deposit cash and contribute to your Supplementary Retirement Scheme account even after reaching the statutory retirement age.
- You can make multiple withdrawals once you have reached the statutory retirement age with no allotted amounts for each withdrawal.
- Should you not want to liquidate your investments, you can move them from your SRS account over to your Central Depository account after you have hit the retirement age.
Since our retirement years play a crucial part in deciding whether we should invest or spend more, a scheme that guarantees huge benefits such as tax savings is a great option to have.
Furthermore, your savings don’t remain stagnant if you put it to work. Not only does the SRS minimise your taxes, but it also increases your chances of a steady incline towards building your wealth.
Would I recommend opening an SRS account? Definitely, if you’re in the higher tax brackets. It’s almost a no brainer.
The challenge comes in choosing the right investments when putting your money to work. If you’re unsure about what to invest in, consult a financial advisor who can advise you accordingly.