There was a lot of feedback on my P6 Supplementary Retirement Scheme (SRS) article, so let's try to better understand what other details we need to look out for to maximise our wealth. Here are the top two questions that were submitted by our readers.
Question 1: Topping up SRS at higher tax bracket to minimise taxes from SRS withdrawals
I have prepared a more personalised spreadsheet, which factors in salary increases, and consequently income tax increases over the years. I realise that most of the taxes paid from the tax deferment are from earlier SRS contributions. Does this mean that we shouldn't top up SRS at the earlier stages of our career?
Let's take a different perspective to the top up. We get a tax deferment opportunity of $15,300 annually through SRS. If you choose not to maximise it, you'll lose it forever. As long as the tables show that you are better off topping up your SRS, you should.
With regards to looking at reviewing your SRS contributions annually, it is important to look at the tax brackets that you are in that year. For instance, if you earn less this year compared to the year before and end up moving down a tax bracket or 2, I would suggest looking at the table again and seeing if it makes sense for you to adjust your contributions based on your new tax bracket.
Always remember that recommendations based on these tables are for wealth maximisation. If you're only interested in minimising tax paid through SRS withdrawal and shortening the time period in which you have money held in your SRS account, you probably would only top up your SRS in your 60s.
Question 2: How later SRS withdrawal age affect your SRS contribution
What happens if I want to retire later? How would that analysis change?
When you retire later, we would have carried on working longer, and in the process potentially made more contribution to our SRS account. This may mean that we would have a bigger SRS account at retirement, and hence may be worse off from greater tax expenses.
I believe what we want is the option to retire early, not necessarily choose to retire early now. Things change after all, and we can't always predict where we want to be in 30 years. Similarly, we want to make sure that we don't plan our finances so tightly that we feel obligated to retire early to feel like we've used our SRS accounts well.
For fun, let's relook at the sensitivity tables. Remember that the bigger the value on the tables, the more you benefit from topping up SRS instead of investing monies after income tax. Negative values means you are better off not topping up SRS, and instead, should be investing after paying for income tax.
Using the age of topping up and the age of retirement as independent variables, let's look at 2 scenarios:
- A 7% investment return, in a 7% tax bracket
- A 7% investment return, in a 11.5% tax bracket
How does retiring later affect your SRS contribution optimisation?
If you start at the age of 28, where you might be in the 7% tax bracket (that's about $80k a year including CPF deduction and bonuses) and have a 7% investment return on your maximum top up of $15,300 a year, according to the table, your retirement benefits from past the age of 74 are reduced. As a result, starting early is beneficial, but retiring later won't change your situation.
Make a little more, as with the case of Scenario 2? If you are at the 11.5% tax bracket (that's approximately earning about $120k a year including CPF deduction and bonuses), things change for you. Regardless of the age you are retiring at, you will be better off investing through your SRS than paying taxes. Take a look at the increasing values as you look at the rows from top to bottom to get a sense of why.
Implications and further thoughts
In a nutshell, starting later in life (despite wanting to retire later) doesn't really help your situation. If you look at the values across the columns from left to right, it is still better to start early, especially if you are at the 11.5% tax bracket, but in general, being pro-active is great, even if you're not at that tax bracket.
More tax reliefs, uncovered
Now that we've talked about tax brackets and returns, let's take a step back and look at the "free", or automatic tax reliefs that we are entitled to in addition to SRS.
Automatic and Voluntary Tax Reliefs:
So what do these terms mean? Automatic in this scenario, means that the government provides these tax reliefs for you without you having to take further action. Voluntary on the other hand, are tax reliefs that you can choose to participate in on your own, and most of these benefits usually mean the inability to touch your cash for an extensive period of time to reap the benefits.
You can stop your SRS contributions when the tax reliefs are small
With regard to other forms of tax reliefs, young Singaporeans don't often think about the tax relief for working parents. For fathers and mothers, Singaporeans get a flat $4,000 tax relief. Working mothers, on the other hand, get an additional tax relief of 15% of earned income.
These tax reliefs will make SRS top ups less attractive for working parents as they might be at a lower tax bracket after they become parents, since this tax relief helps to reduce your taxable income. For working mothers with many children, topping up SRS may not even be an option since they might have reached their personal income tax relief cap of $80,000 with this tax relief.
Conclusively, the attractiveness of SRS top-up varies across different stages of your life, and you can adjust this accordingly based on how tight your finances are and your current tax, and when you retire. We hope you'll also learn a little more about how the Endowus SRS solution fits into your investment plans and your future.
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