Things to consider before investing for retirement using your Supplementary Retirement Scheme (SRS) account

Singaporeans had the highest life expectancy in the world in 2017 at 84.8 years, which makes beginning retirement planning at an early age even more important, so that your finances support you to and through retirement. In fact, an HSBC survey showed that working-age people in Singapore today expect to save for retirement for 9 years longer than current retirees did.

The government has implemented the Supplementary Retirement Scheme (SRS) as one of the ways to encourage Singaporeans to be better prepared for retirement over and above their CPF savings. SRS is also available to Permanent Residents and Foreigners who derive income in Singapore.

Planning for retirement through investing your SRS can potentially help you cover the high retirement cost through the tax savings and higher investment returns made.

Investing with SRS can help your retirement in the following ways.

Tax relief

The main advantage of contributing funds to your SRS account is the tax relief received. Singaporeans and PRs are able to contribute up to $15,300 in their SRS accounts each year, while foreigners can contribute a maximum of $35,700 each year. Any sum of money that they contribute reduces their income tax in the Assessment Year following the year of contribution on a dollar-for-dollar basis, subject to a cap on personal income tax relief of up to $80,000.

To get an idea of the tax benefits you can enjoy, let's look at the example below:

You save $700 on taxes, which is about 27% of the total tax payable.

Withdrawals at retirement age

You can start withdrawing from your SRS account when you reach the statutory retirement age (currently set at 62 years), and 50% of the withdrawal amount is taxable. SRS withdrawals can be spread across a maximum of 10 years to enjoy the 50% tax concession. 50% of the balance remaining in your SRS account at the end of the 10 year withdrawal period will be subject to income tax.

Deferring your tax liability is beneficial if you have a low taxable income after the statutory retirement age. For example, you decide to withdraw $40,000 from your SRS account at age 63 and have no other source of income. 50% of the withdrawal amount is subject to tax ($20,000), but given that the first $20,000 of chargeable income is currently tax-free, you would effectively have $0 in tax payable.

Withdrawals prior to retirement age

Unlike CPF, you can withdraw from your SRS account prior to retirement. This provides investors with a liquidity option if they need to use the funds in their SRS account. However this is subject to a penalty of 5%, and 100% of the withdrawal amount will be taxable. It's important to consider whether you require the funds in the short-term prior to contributing to your SRS account, because making premature withdrawals can leave you paying more in penalties and taxes than what you initially intended.

There are a few specific scenarios where you can withdraw your money from the SRS account with no penalty imposed, such as withdrawal on medical grounds or terminal illness, and 50% of the withdrawal amount will be subject to tax, with certain exemptions. For example, there is a tax exemption on up to $400,000 of the withdrawal amount upon the death of an SRS member or full withdrawal on the grounds of terminal illness. In the case of bankruptcy, the penalty is waived but 100% of the withdrawal amount will be subject to tax.

Foreigners (non-PRs) can also withdraw in one lump sum with no penalty if they have maintained the SRS account for at least 10 years from the date of the first contribution, and 50% of the withdrawal amount will be taxable.

Higher interest returns than cash

As of end-2017, there were 141,000 SRS account holders, with contributions amounting to nearly $8.2 billion. Of this, about 1/3 of the SRS funds are held in cash. This may not be an ideal situation as funds sitting idle in your SRS account will only earn an interest of 0.05% per annum.

Earning this low rate of interest on your contributions will erode your savings over the long-term, as it will unlikely beat inflation. The SRS account was designed for you to invest your funds, and you have a higher probability of earning a higher rate of return to maximise your retirement income over the long-term.

To get started with Endowus, click here.

Curious to learn more? Pick up tips to optimise your SRS savings and supercharge your retirement plan by exploring the Endowus Fin.Lit Academy.

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This article is for information purposes only and should not be considered as an offer, solicitation or advice for the purchase or sale of any investment products. It is recommended that you seek financial advice as to the suitability of any investment. Whilst Endow.us Pte. Ltd. (“Endowus”) has tried to provide accurate and timely information, there may be inadvertent delays, omissions, technical or factual inaccuracies or typographical errors.

Any opinion or estimate above is made on a general basis and none of Endowus, nor any of its affiliates, representatives or agents have given any consideration to nor have made any investigation of the objective, financial situation or particular need of any user, reader, any specific person or group of persons. Opinions expressed herein are subject to change without notice.  

Investment involves risk. The value of investments and the income from them can go down as well as up, and you may not get the full amount you invested. Past performance is not an indicator nor a guarantee of future performance.

Please note that the above information does not purport to be all-inclusive or to contain all the information that you may need in order to make an informed decision. The information contained herein is not intended, and should not be construed, as legal, tax, regulatory, accounting or financial advice.