Guide to Supplementary Retirement Scheme (SRS)

 

If you have been following various finance forums or hanging out with friends, you might have been told to top up your Supplementary Retirement Scheme (SRS) account to lock in your retirement age. However what exactly is an SRS account and what does it mean to 'lock-in' your retirement age. In this article, you will understand more about SRS and the potential benefit you can gain from it

What is the Supplementary Retirement Scheme (SRS)?

SRS is a voluntary saving scheme for individuals to save for their retirement in addition to their CPF. While doing so, you would be eligible for tax relief equivalent to the amount saved to your SRS account. As such the more you contribute, the more you save on tax*.

If you are a Singaporeans, you can contribute up to $15,300 yearly while foreigners can contribute up to $35,700 yearly to their SRS

Unlike CPF, you can withdraw your money from your SRS account anytime. However, you may not want to do so as early withdrawal will be subjected to a 5% penalty on the sum withdrawn. Besides, 100% of the sum withdrawn will be taxed.

*There is a personal income tax relief cap of $80,000 for all tax reliefs claimed. As such, do evaluate whether you would benefit from your SRS contributions before going ahead.

                                                                        Source: DBS

So how much could you potentially save from the tax relief?

The table below shows the income tax rate you are subjected to.

Notice there is a big jump in tax rate when your income crosses above $40,000?  That is the point where you can consider contributing to your SRS to maximize your tax relief.

To give you an example, if you have earned $40,000 last year, you would have paid $550 in income tax this year.

Fast forward to this year, you got a promotion and now earn $50,000. When the time comes to pay your income tax, you would be paying $550 (first $40,000) + $700 (next $10,000) = $1250. This is definitely a significant increase.

However, if you were to deposit your pay increment of $10,000 into your SRS, you will be given a dollar for dollar tax relief of $10,000. As such only the first $40,000 of your salary is chargeable and your income tax drops back down to $550. Saving you $700.

You can use DBS's SRS calculator to calculate how much tax savings you can enjoy.

(Tax relief will be automatically applied to your tax based on the information provided by the SRS operator as such you do not have to do anything to make a claim)

SRS withdrawal

As mentioned, you can withdraw your SRS money anytime. However, this is subjected to a 5% penalty and 100% of the withdrawal will be taxed.

So when can you withdraw penalty-free?

You can withdraw your money penalty-free after the statutory retirement age (currently 62). Once you hit this age, you can withdraw your SRS funds in cash or investment. And depending on your needs, you can choose to make a lump sum withdrawal or spread it out across 10 years. (All withdrawn amounts are subjected to 50% tax, including any annuity streams you might have)

For investment in life annuities, the 10 year withdrawal period does not apply, as such you can continue receiving your annuity streams in perpetuity.

Investing with your SRS monies

With your money sitting in your SRS account earning a base interest of 0.05% per annum, it is highly recommended for you to invest with it and generate a higher return. Here are 10 investments you can make with your SRS account.

1. Stocks listed on the SGX

2. REITs listed on the SGX    

3. ETFs listed on the SGX

4. Bonds listed on the SGX

5. Singapore Savings Bonds

6. Regular Savings Plan

    Invest in stocks, REITs, ETFs, and bonds listed on SGX

7. Robo Advisors

    Endowus, StashAway, MoneyOwl

8. Unit Trusts/Mutual Funds

9. Single-premium Insurance Products/Annuities/Endowment

    Not allowed to purchase critical illness, health, and long term care product

    Check with your agent if you are planning to use your SRS funds.

10.Fixed Deposit

For SRS investment, you do not have to invest via the banks administering your SRS account. You can continue using your own brokers or even the other banks after linking your SRS account to your broker.

For more information, you can look at this article by dollarsandsense.sg

Should I use SRS or CPF Retirement Sum Top-Up?

Both SRS and CPF RSTU allows you to save more for your retirement while benefiting from the tax relief. However, that is where the similarities end. Here are some of the differences between both.

SRS can be withdrawn anytime

While there is a penalty fee when it comes to withdrawing from your SRS account, the flexibility of your SRS account provides you a certain amount of liquidity in the event you require your money urgently. On the other hand, you will not be able to access your CPF funds at all.

Yearly contribution cap

SRS has a higher yearly contribution cap of $15,300 for Singaporeans. On the other hand, the CPF RSTU has a contribution cap of $7,000. (Another $7,000 if you include contributions to your family members)

Interest rate

SRS provides a base interest rate of 0.05% while CPF has a minimum guaranteed interest rate of 4%. Of course, you can invest with your SRS money and potentially achieve a higher interest rate. However, this is not guaranteed as compared to CPF.

Why should you open your SRS account now?

You may not be earning more than $40,000 annually as of now, however by opening your SRS account now and topping up at least S$1, you will lock in your retirement age (currently at 62). Meaning to say if the retirement age were to increase in the future, you will still be able to withdraw your money from your SRS penalty-free at age 62.

Opening an SRS account

SRS accounts are managed by the 3 local banks namely DBS, UOB, and OCBC. To begin making contributions, you can follow the steps below

1. Log in to your ibanking account (DBS/UOB/OCBC)
2. Apply for Supplementary Retirement Scheme
3. Top up at least $1 to your SRS

Note: You can only have 1 SRS account at any point in time. As there are not a lot of difference in terms of what the 3 banks offer, you should consider just opening with the bank which you frequently use.

Do look out for promotions by respective banks. From time to time there will be promotions like cash gifts or vouchers if you open an SRS account with them.

Opinion

Once your chargeable income (annual Income - other tax relief) crosses the $40,000 mark, and you are considering between SRS or CPF RSTU, I would say prioritize SRS first as CPF RSTU has a maximum amount you can contribute in total if you want to get the tax relief. For recipients under age 55 the max top-up that will be eligible for tax relief is the Current FRS - SA Savings (Including those withdrawn under CPFIS-SA) While for recipients above age 55, it is the Current FRS - RA Saving.

Next, with SRS accounts having a base interest of 0.05% per annum, you should invest it to obtain a higher return. On the other hand,  for your CPF SA, since it is already providing a 4% per annum return you may consider letting the fund sit there. (Treat it as a bond instead)

Lastly, if you do not want to be taxed during the withdrawal stage, the maximum amount you should have in your SRS is $400,000. Once you hit the statutory retirement age you can withdraw $40,000 per year for the next 10 years*. (Anything under $40,000 per year will not be taxed)

This assumes you do not have other taxable income like rental income.