Everything You Need to Know about the Supplementary Retirement Scheme (SRS)

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14 Jun Everything You Need to Know about the Supplementary Retirement Scheme (SRS)

Supplementary Retirement Scheme (SRS) is a voluntary saving scheme that complements your CPF savings for retirement. The Scheme is open to everyone living in Singapore and Citizens, Permanent Residents and Foreigners are all allowed to open an SRS account. Other than to increase one’s retirement nest egg, contributing to the SRS account also allows you to reduce your income tax bill.

The SRS provides two key tax saving benefits.

  1. Tax saving benefit on contribution
  2. Tax saving benefit on withdrawal

 

Tax saving benefit on contribution

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When you contribute to your SRS account, your chargeable income will be reduced by the amount of your contribution.

For example, if you have racked up $120,000 in chargeable income, your income tax bill will be $7,950 based on the progressive income tax rate by IRAS. If you choose to contribute $12,750 to your SRS account, your chargeable income will be reduced to $107,250 ($120,000 – $12,750) and your income tax payable will become $6483.75.

Here are how the numbers look like

  • Without SRS contribution
    • Chargeable Income: $120,000
    • Income Tax : $7,950
  • With $12,750 SRS contribution
    • Chargeable Income: $107,250
    • Income Tax : $6,483.75
    • Tax saving: $1,466.25

 

Simply by contributing $12,750 to your SRS account, you will be able to reduce your income tax by $1466.25. That is the equivalent to a brand new laptop!

It does sound very enticing but please do note that there is a yearly contribution limit to your SRS account. The limits are $15,300 per year for Singapore Citizens and Permanent Residents and $35,700 for foreigners

Tax saving benefit on withdrawal

The second tax saving benefit for SRS occurs when you withdraw your money from the SRS account. Only 50% of the amount that you withdraw from your SRS account is taxable if the withdrawal is after the retirement age (62 years old at the point of writing).

It is also important to take note that the SRS withdrawal can be spread across a maximum of 10 years (unless you have invested in an Annuity or Endowment Plan, you will then be able to withdraw for more than 10 years) to enjoy maximum tax saving benefit.

Below is the example given by IRAS. If you have $400,000 balance in your SRS account, the withdrawal plan and tax payable is as below:

pic 1

Everything looks great. Should you open a SRS account immediately then? Before you head out to do just that, here are some factors you might want to consider.

Three Things to Note

Basically, there are 3 key things you need to take note:

Penalty on withdrawal before retirement age

The Supplementary Retirement Scheme (SRS) savings are for retirement purposes. You should withdrawal the money only after the retirement age. However, if you wish to withdraw the money before retirement age, 100% of the withdrawal amount will be taxable.

In addition, a 5% penalty charge will be imposed to your withdrawal. For instance, if you withdraw your SRS account by $40,000 when you are 61 years old, you will be subjected to additional taxable income of $40,000 and also a $2,000 penalty charge.

pic 2-2

Therefore, you must ensure that you have planned for your finances properly before you deciding to contribute to the SRS account.

There are specific circumstances where you are allowed to withdraw your money from the SRS account before retirement age with no penalty charge. Please read about it here.

Direct property investment is not allowed

Currently, IRAS does not provide a list of approved investment products. You will need to check with your SRS operator for the investment instruments that is allowed. Generally, there are not many restrictions on the use of money in the SRS account; you are free to invest in almost any instrument of your choice.

However, direct property investment is strictly not allowed. If you are planning to purchase a property in the near future, you should not open an SRS account.

Potentially pay more tax on withdrawal

The last but the most important point to take note is that you may end up paying more tax if you contribute to your SRS account at wrong time. The concept is pretty easy to comprehend but the calculation is tedious and complex.

It goes like this. If you contribute to your SRS account at your early age, your SRS account will grow to a big amount when you are retired. You will receive tax saving benefit from your contribution to SRS account.

However, during the withdrawal period after retirement, you may ended up withdrawing a large amount of money and hence be required to pay the correspondingly high income tax. Even though only 50% of the withdrawal amount is taxable, large sum withdrawals will still put you in an expensive tax bracket.

Therefore, even though the SRS can potentially allow you to save tax, the timing of when you should contribute to SRS account is critical. There is an optimum age when you will benefit the most for contributing to your SRS account. Generally, the optimum age will be around 40-45 years old. Do note however, that this optimum age vary from person to person. The following factors will affect your optimum age.

  1. Your age
  2. Your estimated income growth rate
  3. Your income tax bracket
  4. Your estimated investment return
  5. Your estimated inflation rate

To compute the optimum age is rather tedious and complex, I have developed a calculator just for that. You can download it here.

In Conclusion

The Supplementary Retirement Scheme (SRS) will definitely provide you tax saving benefit. However, it is crucial to know when you should contribute to your account. If not you may end up paying more tax in the future.

You can approach DBS, OCBC or UOB bank to open your SRS account. Please note that the information on this page is not exhaustive. I am just summarizing all the important points. For more information on SRS, kindly visit the IRAS and MOF website.

 

Before you go, don’t forget to download the SRS Calculator which will help you determine your optimal age to start contributing to your SRS:

Download The SRS Calculator Here

 

We have shared a series of video of Louis explain the use of the SRS over at BigFatPurse’s Youtube Channel, you can watch it here:

image: channelnewsasia



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10 Comments
  • KOH GUAN KIAT
    Posted at 11:21h, 14 June Reply

    I think you have double accounted for the tax saving. your 12,500 chargeable income are deferred when you deposit in your SRS account. the tax is therefore deferred and not save, granted that 1 may fall under lower tax bracket and that when retiring, the amount is tax at only 50%. still i don’t see 2 tax saving as it claims.

    What if those who have invested and their SRS account with compound interest and capital gain becomes more than 100%? the 50% saving is gone. and they may actually pay more tax because of more than 100% gain from their investment and also what if the tax rate gone up?

    Granted that most people may actually needn’t pay any tax at all on this 12,500 if they structure to withdraw annually below the minimum tax amount.

    • Louis Koay
      Posted at 12:09h, 14 June Reply

      Hi Eddie,

      Thank you for your comment.

      Yes. One may ended up paying more tax in future if the total SRS savings grew to higher amount. That is the reason why I created the SRS calculator to calculate the tax that you are paying with and without contributing to SRS account.

      To put it simply, so long as the SRS account balance is lower than 400k in total, you are actually saving on tax payable.

      Louis

  • Vikas
    Posted at 15:50h, 14 June Reply

    Too laxy to update the tax saving calculation for the new maximum contribution of $15,300 huh? Let me do it for you. The new tax would be $6190.5, and the tax savings would be $1759.5

    • Louis Koay
      Posted at 18:04h, 14 June Reply

      Hi Vikas,

      Thanks for the calculation.

      Louis

  • Mark Mah
    Posted at 19:34h, 14 June Reply

    Please watch out on SRS withdrawals for foreigners. They are subject to Withholding taxes. Foreigners include Permanent Residents.

  • Junda
    Posted at 00:17h, 15 June Reply

    Thanks Louis. I read the article with interest.

    Learnt something new today: that it was possible to pay more taxes due to too much (!) money in your SRS due to the 10 years period. Though i think this probably won’t be a problem for the majority.

    Would it be possible to get past this though to say buy an annuity with the “excess” money and leave the remainder as cash for withdrawal? Always assuming that SRS structure does not change in the future and that our investment returns are good of course.

    One other factor, i think we need to consider is the opportunity cost of the money saved (I view SRS as a tax deferment ). Assuming that one doesn’t blow away the tax savings on expenses, even dumping the money into say fixed deposit every year will gain 1+% compounded every year. This can also offset any additional taxes due to excessive (!) monies in SRS.
    1)

    • Louis Koay
      Posted at 10:00h, 15 June Reply

      Hi Junda,

      Yes. SRS is still a good way to save on tax expense. If you are able to grow to a bigger SRS amount in future, you might want to consider to get annuity plan to stretch the withdrawal period. I also believe that only minority has this problem as the take up rate for SRS account is still quite low.

      Regards
      Louis

  • Jasmin
    Posted at 07:36h, 15 June Reply

    I think it is a happy prob to pay tax when retired. It is better than having little or no money when retired. So i am not that concern about paying tax on the SRS money wirhdrawn. The key is to grow this pot of funds to become another source of funds for retirement

    • Louis Koay
      Posted at 10:08h, 15 June Reply

      Hi Jasmin,

      Yes. It is a happy problem to have too much money. I just want to make sure that there is a potential to pay more tax than saving tax by using SRS scheme.

      Louis

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