SRS represents Supplementary Retirement Scheme was introduced in 2001 but not alot people are familiar with it By putting your money in SRS, you can use it to offset your taxes and the money can be used for investment. It is a win and win. Reduce tax and increase your money. Seems like a no brainer deal, I will explain the pros and the cons. Then you evaluate whether this tool is suitable for yourself.
According to statistics from the SG government, there are only 127,753 SRS accounts in Singapore based on end of 2016. It is not even close to 10% of the tax paying population.
The greatest advantage of SRS is the ability to reduce taxable income. Maximum annual contribution of S$15,300 for Singaporeans and PRs, and S$35,700 for Foreigners. Upon reaching the retirement age, you can use 10 years to withdraw the money in SRS account. You will be to be taxed based on half the amount you withdraw. How does this benefit you then? For example, if you deposit $10,000 into your SRS account this year. For the next taxable year, your taxable income will be reduced by $10,000. If the original taxable income is $50,000 it will now be reduced to $40,000. See below image which I extract from DBS website for illustration purpose.
After 62 years old, if you withdraw S$40,000 each year, the taxable amount is S$20,000. However in Singapore, taxable income is $20,000 and above. Hence, you do not need to pay any tax. So S$40,000 x 10 years = $400,000 for the SRS account. This is the target amount you want to reach and you will not be subjected to any taxes. Do note, if you withdraw a lumpsum more than S$40,000 in a single year, your tax can be considerably high.
What if I withdraw before 62 years old?
You can withdraw from SRS account before the age of 62 years old but you will be subjected to penalty of 5% and your full withdrawal amount will be taxable (not half of it will be taxed!).
Awas! Therefore you need to weigh this, whether you want to lock your money for 20-30 years just for the sake of tax reduction. Utilise SRS account only when you don’t need this amount of money. You will only see it after 62 years old. Boy, where will I be then? Will I be in the graves?
The nature of SRS account is more well received by the middle-aged group. Ages between 46 – 55 years old represents 33% of the SRS accounts. The 2nd largest group is from 36 – 45 years old, they represents between 29% – 31%.
This is not surprising because those in 40+ years old should reach the highest income bracket group. SRS helps the high income group to reduce their taxes. Furthermore, a 30 years old guy will need to wait for 32 years before he can utilise the money from SRS account. Hence, condo price drops to S$500 psf and you cannot use the money to buy it. It will be an opportunity loss. Whereas a 50 years old man just need to wait for another 12 year in order to withdraw from SRS account.
Use SRS account as a tool for Retirement Planning
You can open an account with 3 local banks DBS, OCBC and UOB to enjoy the benefit of tax savings.
1. Try to put in the maximum amount. For now it is S$15,300.
2. Plan to cap it at S$400,000. Pace yourself to reach that amount. Nothing more nothing less. In future, this amount may increase based on inflation requirement.
3. Invest to increase your return.
See below image from DBS for further illustration. This is based on above example, if you place S$10,000 per annum in SRS for the next 27 years.
I will beg to differ for the Balanced portfolio as DBS is trying to sell you Unit Trusts. In short, if you park your money there and do nothing, you will get S$270k. If you take a balanced approach, you can achieve about S$388k. If you are aggressive and put in stocks, you can get S$489k. 4% per annum is average return over 27 years.
SRS account can be used for fixed deposit, single premium product, equities, REITs, Unit Trust, Bond, etc.
Annual Income lesser than S$40k will benefit less
In order to benefit from SRS account, your taxable income needs to achieve a certain level of comfort. In Singapore, the tax system is a progressive approach in different tax bracket. SRS serves to bring down the taxable income to a lower tax bracket.
For example, if a guy has an income of S$90,000. Without SRS, first S$80,000 will be subjected to a tax of S$3,350. The rest of S$10,000 will be subjected to S$1,150 which is 11.5%. Total tax is S$4,500.
If he pumped S$15,300 and his taxable income is reduced to S$74,700. His tax bracket is shifted down by one level. The first S$40,000 will be subjected to tax S$550. The remaining S$34,700 will be subjected to 7% tax which is S$2429. Total tax is S$2979. This means a saving amount of S$1521 which is equivalent to 34% tax savings.
1) SRS is not flexible
Remember the penalty upon early withdrawal. The full amount will be subjected to taxes.
2) You see the money but you cannot touch
Similar to Special Account in your CPF. I do not need to add more to explain.
3) Do leave your money in SRS and not do anything to it
If you leave it there as Fixed Deposit, you make only 0.1% interest. This is losing money to inflation. You need to put it to use. Put it in equities or give me the money.