The Supplementary Retirement Scheme (SRS) is part of the Government's multi-pronged strategy to address the financial needs of a greying population. A voluntary scheme that complements the CPF, Singapore tax residents can contribute a varying amount to SRS (subject to a cap) at their own discretion.
The earliest SRS withdrawal age is tied to the prevailing retirement age when we contribute our first dollar into our SRS account. With the increase of the retirement age to 63 years old in 2022, there is never a better time to start contributing to SRS accounts, and consider investing your SRS monies.
SRS is often used by employed Singapore tax residents to reduce their taxable income. Go beyond opening an SRS account just for the income tax relief. The SRS account can be used for investment and insurance products too. Based on the information released by the Ministry of Finance, most SRS accounts are either held in cash or invested in real estate investment trusts (Reits), exchange-traded funds (ETFs), and stocks. SRS funds can also be used for certain insurance products.
Here are the key investment options for SRS.
SRS investing in Reits, ETFs and shares
Why SRS contributors invest in SGX-listed securities
With a brokerage account, you are able to invest in SGX-traded REITs, ETFs, shares and other products. This is a popular SRS investment option for Singapore tax-residents because of the higher expected returns from REITs and equities investments.
Why Reits, ETFs and SGX-listed shares may be poor SRS investment choices
There are some notable disadvantages of investing your SRS in high yield instruments like REITs and STI ETFs (ES3, G3B).
Firstly, you are limited to using local brokerages to trade, which charge exorbitant minimum fees of $25 or 0.28% of trading value, not including GST. This means that you have to invest around $9,000 per trade to make the most of your brokerage fees for your investments.
Secondly, due to the brokerage charges, you will not be able to invest small amounts cost-efficiently. This means that you are forced to:
- Make larger SRS contributions before you can invest
- Leave dividends or interest received from SRS investments in cash, without being able to invest it efficiently
- Invest all dividend returns back into the market as soon as possible for your SRS equities investments to grow and compound efficiently. Unfortunately, that cannot be done easily due to brokerage costs.
Buying insurance products with SRS
Why SRS contributors invest in insurance products
The term "Supplementary Retirement Scheme" implies that the money is meant for retirement. Retirement investment is associated with building long term income streams, making annuity products an intuitive choice. As the 10-year withdrawal period limit for your SRS account does not apply for annuities, this makes SRS annuity products even more attractive.
Over the past years, more than 20% of SRS monies are invested in life insurance products, mainly single premium annuity/non-annuity plans, as well as endowment plans.
Why annuity and endowment plans are poor SRS investment choices
Yet, SRS insurance options are not favourable because:
- Being "safer" investment products with some guaranteed returns, the insurer has to invest in low volatility, fixed income products, which are low yielding in the current interest rate environment
- It has larger investment requirements
- It has longer lock-in periods
Given the long investment horizon of most SRS accounts, if you need to commit to a long-term investment option, it is more prudent to invest in relatively higher return investments to grow your SRS retirement monies more meaningfully.
Keeping SRS monies in fixed deposits and cash
Why you should not keep SRS in cash and fixed deposits
The worst decision you can make with your SRS account is to keep it in cash or fixed deposits over the long term. SRS cash gives the same low 0.05% p.a. across the 3 local banks (DBS, OCBC and UOB), which is significantly below inflation rates in Singapore. Over the long run, whatever tax savings you would have made on your SRS would have been eroded by the low interest rates for cash and fixed deposits.
As seen from the table above, even with the attractive tax bracket of 19%, if you were to leave it in cash or fixed deposits at existing rates, you would only get 1.11% and 1.34% compounded annualised returns for your SRS monies after 10 years.
However, if you were to invest your SRS monies in a balanced portfolio at 7%, you can let your tax savings compound more aggressively to 9.28% p.a.. Simply saving for retirement is not sufficient; investing your SRS will make a more meaningful difference.
Investing in unit trusts for SRS
Given the longer investment horizon for SRS monies, you would want to invest in a manner that gives you the biggest account balance when you withdraw your SRS. Many SRS account holders have a long investment horizon till the age of 62. This would mean:
- Investing — through a low-cost platform — into low-cost unit trusts, to minimise loss of return through fees
- Allocating to riskier asset classes, such as equities, to maximise investment returns
- Being globally diversified across geographies and industries to minimise risk
While investing in unit trusts that are exposed to global markets is the best strategy, ensuring that you have the lowest cost access to this SRS investment strategy and funds is key. Through a traditional fund platform, you have to pay for:
- Higher cost retail share class funds, which can go beyond 1.75% in fund total expense ratio;
- A one-off sales charges, typically at 1% of your investment value;
- A recurring platform fee, at up to 0.35% p.a. of your investment value.
When you invest your SRS with Endowus, you will get access to funds with over 10,000 underlying securities in our global equity portfolio on our platform, at a low fee. Find out more about Endowus' SRS offerings here. To get started with Endowus, follow this link.
Next on the Endowus Fin.Lit Academy
Read the next articles in the curriculum:
- Basics of investing: Why should we invest?
- Wealth building: The power of passive investing
- Personal finance: Why do habits matter?
- Retirement: Plan for retirement with this simple checklist
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