With headline inflation rising beyond 7% in 2022, those living in Singapore are looking for ways to save up on any unnecessary expenses. For middle and high-income taxpayers in particular, SRS account contributions provide attractive tax savings. However, with a low 0.05% interest rate on SRS accounts and high inflation, SRS contributions should not just be set aside for tax efficiency, but can also be ploughed into investments to boost your long-term retirement savings.
In this article, we consider what to invest with SRS, and what the best SRS investment option would look like.
Should you invest your SRS savings in REITs, ETFs, and shares?
With a brokerage account, you would be able to invest in SGX-traded real estate investment trusts (REITs), exchange-traded funds (ETFs), shares and other products. This is a popular SRS investment option because of the familiarity with Singapore stocks, and higher expected returns from REITs and equities investments.
There are some notable disadvantages of investing your SRS in high-yield instruments such as REITs and STI ETFs (ES3, G3B).
Firstly, you are limited to using local brokerages to trade, typically charging 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 cannot 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.
Should you keep your SRS savings in fixed deposits?
With rising interest rates in 2022, banks and insurance companies have aggressively increased their fixed deposit rates to retain and attract savers. Promotional interest rates for 12-month fixed deposits, as of 8 September 2022, are as high as 2.75%. However, promotional rates are likely not applicable for SRS savings. They also do not beat current inflation rates.
Should you buy insurance products with SRS savings?
As the term "Supplementary Retirement Scheme" spells out, the programme is meant for retirement preparation. 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 to annuities, this makes SRS annuity products even more attractive.
As of December 2021, 26.1% of SRS monies are invested in life insurance products, mainly single premium annuity/non-annuity plans, as well as endowment plans.
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 typically yield lower returns
- It has larger investment requirements
- It has extended 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.
Investing your SRS savings in unit trusts
Given the longer investment horizon for SRS monies, you would want to invest in a manner that gives you the highest return when you withdraw your SRS. Many SRS account holders have a long investment horizon till the age of 62 or 63. 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 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 or bank unit trust 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.
At Endowus, you can gain access to advised portfolios that are aligned with your risk tolerance. You pay only 0.4% p.a. for a portfolio of funds that are low-cost. For D.I.Y. investors, you can pick from 126 different funds that take in SRS funds on our Fund Smart platform. Some exclusive, low-cost additions include the Amundi Prime USA fund and the Dimensional Global Core Equity Fund.
You can learn more about Endowus SRS offerings here.
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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