Singaporeans have one of the highest life expectancies in the world, which makes retirement planning even more pertinent. This is where the Supplementary Retirement Scheme (SRS) comes in. Before we get things rolling, what is SRS? Never heard of it? No worries.
SRS is a voluntary scheme proposed by the Singapore government to encourage individuals to save up for retirement! Either you or your employer may contribute any amount to your SRS account up to the maximum SRS contribution. Sounds like CPF right? But it’s more than that!
There are several benefits to opening an SRS account. Firstly, you may make SRS contributions at any time and as often as you like. Secondly, contributions to SRS are eligible for tax relief. Thirdly, investment returns are accumulated tax-free before withdrawal and only 50% of the withdrawals from SRS are taxable at retirement. Sounds great, right?
Well, there’s more. You will be thrilled to hear that the SRS is open to everyone in Singapore. Yes, this includes not only Singaporeans but also Permanent Residents and even foreigners who derive any form of income in Singapore. You simply need to:
- Be 18 years old and above;
- Not be an undischarged bankrupt;
- Not suffer from a mental disorder; and
- Be capable of managing your affairs.
Now that we’ve gotten this basic information out of the way, let’s move on to the real deal. How should you contribute to your SRS account to maximise your savings and benefits? If you are curious, keep on reading for the 9 Best Tips for Your Supplementary Retirement Scheme (SRS) Account!
1. Know When to Withdraw
Psst. Usually, it is after the retirement age of 62 years old.
As the SRS account is for retirement purposes, you should only withdraw your savings after the retirement age. This is because if you withdraw the money before the retirement age, 100% of the withdrawal amount will be taxable. This means that all the tax relief that you have enjoyed earlier will be effectively negated. Further, a 5% penalty will be charged to your withdrawal. And why would you want that?
However, don’t fret! You may still withdraw your savings from the SRS account before the retirement age without a penalty as long as you fall under these circumstances. Firstly, withdrawal in the form of annuities. Secondly, withdrawal on medical grounds. Thirdly, withdrawal on terminal illness. Fourthly, withdrawal in the event of a bankruptcy. Lastly, withdrawal in one lump sum by a foreigner. But, depending on which circumstance you fall under, do note that 50-100% of the withdrawal sum will be subject to tax!
Thus, remember! If there’s no emergency use for the money, why subject yourself to additional penalty charges?
Another point to note is that when you reach the retirement age, you can spread out your withdrawals over a period of 10 years. Even though 50% of your withdrawal sum will be taxable, you can still minimise any income tax by spreading the withdrawals out! In addition, you can withdraw more when you do not have other income streams since as of now, personal income starts to be taxed at SGD $20,000.
2. Check With Your SRS Operator What You Can Invest In
As of now, IRAS does not provide a list of approved investment products you can buy. Hence, you should check with your SRS operator for the type of investment instruments that are permitted. SRS operators include DBS Group Holdings Ltd, Overseas-Chinese Banking Corporation Ltd and United Overseas Bank Ltd.
In general, there is a variety of financial products approved under the SRS scheme, including:
- Fixed deposits
- Unit Trusts
- Real Estate Investment Trusts
- Single Premium Insurance
- Index funds and ETFs
One crucial thing to note is that you cannot make direct property investment with your SRS funds. As such, if you see yourself buying a property in the near future, you may want to reconsider opening an SRS account.
3. You Might be Paying More Tax on Withdrawal
That is if you are contributing to your SRS account at the wrong time!
Think about it.
If you contribute to your SRS account when you are young, the funds in your SRS account will become huge by the time you are retired.
On one hand, you will enjoy tax savings from your contribution to your SRS account in the meantime.
On the other hand, you may end up withdrawing a large sum of money after the retirement age. As such, even if only 50% of the withdrawal sum is subject to tax, you will still be required to pay a relatively high income tax. This is especially since you will pushed into an expensive tax bracket.
Therefore, even though you may save tax in the beginning, when you contribute to your SRS account is crucial! Generally, a good guide is to contribute to your SRS account between 40 and 45 years old.
4. Don’t Leave Your SRS Account Idle… Invest!
Simply put, the reason is inflation. Inflation diminishes the value of your money. This means that as time goes by, the value of your money drops. Likewise, things are going to be more expensive at the time you withdraw your savings from your SRS account.
In addition, the interest rate on SRS funds is fixed at 0.05% per annum. When you consider that inflation is estimated to be around 2%, your money in your SRS account will most definitely lose value over time. Thus, it is not a good idea to simply leave your money in your SRS account and expect your savings to grow.
Long story short, you should definitely invest your SRS funds to stay ahead of inflation. You should never underinvest!
5. Familiarise Yourself With Investment Products
One of the basic things you should do is to be knowledgeable about what you want to invest in. Never invest in something you don’t know about!
Firstly, what you can do is to read up on the various types of investments allowed for SRS to better understand each of their pros and cons.
Secondly, you should also learn about some basic investment concepts like risks vs. returns; passive vs. active investing; and diversification.
These may sound daunting but once you get the ball rolling, you’ll be a pro before you know it!
6. Approach a Credible Financial Advisor
There’s nothing wrong with asking for help sometimes!
If investments are simply not your thing, or you are too busy to do all the research, having a good financial advisor might help!
A financial advisor can:
- Summarise these financial concepts into bite-sized information,
- Explain further where you lack understanding, and
- Work out your risk profile according to different financial goals you may have.
Furthermore, with an independent financial advisor, your options are not limited to what the bank or firm sells. This way, you are able to plan your retirement in a holistic and personalised way.
7. Take Note of Investment Fees
You should also note the fees that come with investments. At first, these fees may appear negligible. But upon closer inspection, they can actually make a significant difference to the returns of your SRS account.
Even though the services that are offered are similar, different banks and firms may charge different brokerage and transaction fees. In addition, they may also provide different incentives and promotional deals.
A final pro tip, many of these local banks run year-end promotions to incentivise people like you and me to open SRS accounts with them. As such, be sure to be on the lookout for exciting freebies and other perks!
Do note that you are in no way obliged to buy what the bank or firm tries to sell you. Your options are always open!
8. Contribute the Maximum Amount
There is a cap on the amount of contribution you can make to your SRS account in a year. For Singaporeans and Permanent Residents, you may contribute up to SGD $15,300 in a year. For foreigners, you may contribute up to SGD $35,700 in a year.
Every year, the tax bill deducts the contributions you have made to your SRS account. Hence, a wise way to save on tax bills is to contribute the highest amount possible to your SRS account every tax year. However, make sure that you have enough savings to do so. The key here is to strike a balance between ensuring sufficient liquidity and enjoying maximum tax reliefs.
9. Adopt a Long-Term Mindset
Here for the long haul~
As mentioned earlier, you generally cannot withdraw funds from your SRS account before the retirement age without paying a 5% penalty and other applicable taxes. As such, you should treat your SRS account as though it is entirely locked up. In this vein, adopting a long-term mindset is key. This means no touching your funds unless you are extremely desperate.
That being said, it is not to say that you should not contribute as much money into your SRS account. This is because ultimately, your profits in your investments go back to you. You are the ultimate beneficiary.
Thus, a good tip is to minimise your chances of having to tap into those funds in your SRS account. You should contribute to your SRS account only if you have sufficient liquidity. Generally, you should have enough for one year of living expenses between your saving accounts and other liquid investments.
In summary, there is a lot to think about when it comes to using your SRS account. From when and how much you should withdraw to what you should invest in. However, it is indisputable that the SRS is definitely a worthy scheme to consider! Having an SRS account not only boosts your retirement plans but also minimises your tax expenses.
Ultimately, before you start contributing to your SRS account, it is advisable to do a cost-benefit analysis to consider the potential earnings from your investments and the tax benefits you can derive from SRS contributions. At the same time, you should also think about the opportunity cost of tying down your funds until the retirement age.
If you follow our 9 Best Tips for Your Supplementary Retirement Scheme (SRS) Account and contribute to your SRS account wisely, you’ll be able to sit back, relax and wholly enjoy your retirement.