Singaporeans had the highest life expectancy in the world in 2017 at 84.8 years, which makes it even more important to begin retirement planning at an early age. 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. Here are a few things to consider if you are looking to invest for retirement using SRS:
1) 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 ~ 27% of the total tax payable.
2. 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.
3) Withdrawals prior to retirement age
Unlike CPF, you can withdrawal 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.
4) Low-interest returns
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 grow your retirement nest egg over the long-term.