SRS account is a Singapore government-sponsored savings scheme to motivate savings in addition to the CPF scheme as the population is aging rapidly. However, the SRS account imposes restrictions on deposits and withdrawals like tax and other penalties. The scheme seems to have more regulations and may not suit short-run investors due to tax issues.
Is it worth investing in SRS? The answer depends on your goals. Read more to know the full details.
What is the Supplementary Retirement Scheme(SRS)?
SRS is a voluntary contribution system established in 2001 by the government to motivate savings. Like other developed countries, Singapore is facing an aging population problem.
In 2019, only 14.4% of the Singapore population was over 65 or above. However, the Asian Development Bank predicts that, in 2030, 25% of the people will be 65 of age or above – a sevenfold increase in a decade because of the long life span and lower fertility rate.
The scheme is voluntary, so the government hopes to use tax relief to induce people to save. Whether an employee or self-employed for a tax purpose, an SRS contributor can deduct the SRS contributions from your taxable income and reduce the taxes paid.
The tax relief for SRS savings is not without limits. A contributor can claim no more than SGD15,300 per year for relief. But the SRS contribution is still a part of the total personal income relief cap of SGD80,000.
You can decide when to contribute to the SRS account, and the contributions must be in cash. Even though your employer pays for you, IRAS will see them as a part of your taxable income.
The tax deadline for filing your SRS contributions for the current year is December 31. Your SRS account operator(the bank holding your SRS account) should receive your contributions no later than the date if you want to claim your tax relief for next year. Another good news is that your bank will file the claim for you without further formalities.
You may have noticed the penalty-free withdrawal age has changed from 62 to 63 for participants making their first contributions on or after July 1, 2022.
However, those before this date can still pull their money out of accounts tax-free at 62. Like SRS contributions, participants claiming tax benefits for next year should file them by December 31.
You can enjoy some tax benefits from withdrawing money at retirement age from the SRS account. The statutory retirement year, also called the penalty-free withdrawal age, is adjusted upwards to 63.
IRAS treats only half of your withdrawal amount for a year as taxable income. That means you pay half of the tax on contributions plus investment gains.
Secondly, the tax benefits from an SRS account extend to investment gains, besides contributions. Finally, you need not pay a 5% penalty upon reaching the retirement age(62 for contributors before July 01 and 63 after that).
More benefits of an SRS account
Besides tax savings, an SRS account offers many benefits you may not have noticed.
- Enhanced returns: Besides saving taxes, contributions’ investment gains are tax-free until you withdraw them. An SRS account will accumulate and reinvest your tax-free profits to increase returns. You may earn more than a general investment account because of the compound effect of the tax-free portions.
- Investment restrictions: You can invest in your favorite assets through an SRS account, such as stocks, bonds, commodities, endowment policies, annuities, mutual funds, and ETFs. The sky is the limit for your investment options. The Singapore government appoints 5 banks: DBS. POSH, OCBC, and UOB to provide SRS services to clients.
- Withdrawal exemptions before the official retirement age: An account holder or appointed person can withdraw money tax-free from their accounts before the statutory retirement age due to a member’s death, medical reasons like a terminal illness, and bankruptcy. The tax treatment is the same as a withdrawal at the official retirement age. And before that, he can get the first SGD400,000 tax-free from an SRS account and pays a 50% tax on the remaining balances.
- Annuity payments: An SRS participant, like you, can choose investments of their choice, including an annuity. You should note that an insurance company pays annuity payments on maturity direct to your SRS account. Like withdrawal regulations, they are subject to penalties or withdrawal tax rules.
- Gain maximization on retirement: You can spread your payments from an SRS account for 10 years maximum on retirement. The Ministry of Finance has recommended it as the most tax-efficient option for retirees.
How Much Can I Save with the SRS Tax Relief?
As said earlier, you can deduct a maximum of SGD15,300 SRS contributions from your annual income as tax savings. The benefits accrue more if you are in a high tax bracket. Below is a table of income tax rates for various income tiers.
|Annual income in SGD||Tax rates|
Up to S$20,000
S$20,001 to S$30,000
S$30,001 to S$40,000
S$40,001 to S$80,000
S$80,001 to S$120,000
S$120,001 to S$160,000
S$160,001 to S$200,000
S$200,001 to S$240,000
S$240,001 to S$280,000
S$280,001 to S$320,000
S$320,001 or above
Besides paying fewer taxes, you can reduce taxes paid through SRS contributions if you are in a high tax bracket.
For example, you earned SGD 120,050 for the last year. To reduce the income tax, you pay the statutory contributions of SGD 15,300 to an SRS account.
You decreased your income tax payable this year twofold with this arrangement.
First, your tax bracket falls from 15% to 11.5%. Your income tax payable without contributions is : SGD120,050 x 15% = SGD 18,007.50. The income taxes to be paid is: (SGD 120,050 -SGD 15,300) x 11.5% = SGD 12,046.25, a reduction in income tax of SGD 5,961.25 due to SRS contributions.
Besides, you save SGD 15,300 x 15% = SGD 2,295. The total tax savings are SGD 5,961.25 + SGD 2,295 = SGD 8,256.25. Moreover, the calculated benefits do not still include future investment and withdrawal tax benefits.
You benefit most from SRS contributions if your tax bracket comprises 3 features: Your taxable base falls into the mid-to-high range, your tax bracket is marginally higher than the one a notch lower, and the gap between 2 brackets is significant.
How Can I Use SRS in My Golden Years?
Sometimes you may need urgent cash and withdraw from the SRS funds before retirement age. It helps to maximize your tax benefits if you understand procedures related to deposits and withdrawals through your retirement savings. Some examples below aid you with the mechanism(all transactions made before retirement age):
You deposited SGD15,000 into your SRS account at the beginning of this year. Still, you withdrew SGD10,000 later in the same year for urgent cash needs. Therefore the IRAS will calculate your tax relief on SGD5,000 = SGD15,000 – SGD10,000 for the fiscal year. Besides, the withdrawal may be subject to full income tax and an early withdrawal penalty of 5%.
This time, you deposited SGD10,000 into your SRS account, and later, you withdrew SGD15,000 in the same fiscal year. You end up with no tax relief granted, and the difference of SGD5,000(SGD15,000 – SGD10,000) will be subject to income tax and penalty.
You changed transaction orders, and the result becomes different in this case. You made a withdrawal of SGD15,000 early this fiscal year but deposited SGD10,000 back into your SRS account. From this, you have to pay full income tax and penalty on the withdrawal but can get tax relief from the deposit.
The order transactions that take place significantly impact your tax benefits and planning.
Ways You Can Maximize SRS Funds
SRS returns are one of the critical pillars of affluent retirement life. The following popular options can help you reach your goals.
1. Single-Pay Insurance Plans
You can use SRS funds to purchase a lump sum plan with life cover to enhance your returns and protect you and your family. SRS accounts have some rules concerning insurance plans you should follow.
- A single-pay plan, including annuity or non-annuity options, is for a maximum of 5 years only.
- A life cover with the total permanent and disability rider should not exceed 3 times the single premiums.
- Other insurance covers should not be available except for the above.
2. Fixed Deposits
Fixed deposits offer a safe and stable return to your funds. If you are approaching retirement, you may try to avoid any market risks besides a guaranteed rate of return. Fixed deposits are a good investment option for you to achieve the 2 goals.
3. Singapore Government Securities(SGS)
SGS offers investors safe and steady income streams. These securities guaranteed in full faith by the Singapore government and its agencies diversify your portfolio risks and provide regular cash flows. The Singapore Government Securities include SGS bonds, treasury bills, and Singapore Savings Bonds.
You can use SRS funds to purchase stocks on Singapore Stock Exchange to increase portfolio returns. Numerous blue chip companies are ideal for long-term investment and pay considerable dividends to stockholders. You should talk to a financial advisor for more details.
Besides, some banks offer monthly investment plans using a “costs of dollar averaging” to reduce risks and increase returns. The initial investment amount can be as low as SGD100 per month. Endowus is a financial technology company based in Singapore that will allow you to invest in Supplementary Retirement Scheme (SRS) money.
5. ETFs/Unit Trusts/Index Funds
Besides stocks, you can include unit trusts, ETFs, and index funds in your portfolio. They range from modeling an index for investments to outperforming markets and fit for long-term portfolio growth. Investors have diverse options in choosing an investment serving their risk appetite.
6. Structured Deposits
Structured deposits are a hybrid of a deposit and an investment. It provides a regular stream of income and the potential for enhanced returns. A bank offering the service will guarantee the principal. The risks of a structured deposit depend on what it invests; therefore, you should consult the bank in detail related to its risks.
Best Banks for SRS Accounts
The Singapore government has appointed four banks as SRS account operators. They are DBS, Posh, OCBC, and UOB. The banks don’t charge any fee related to SRS account operations but collect transaction fees charged by third parties for investing in stocks, bonds, and unit trusts.
How to Open an SRS Account
Who is Eligible?
- You are a person aged 18 or above.
- You are a Singapore citizen, permanent resident, or foreign national.
- You are not bankrupt or under related proceedings.
- You cannot apply for more than 1 SRS account.
You have two ways of opening an SRS account. Online procedures are the quick and convenient ways, or you can visit a branch of the banks appointed for more details about the account.
Frequently Asked Questions
1. Should I withdraw the remaining SRS funds after a 10-year withdrawal period?
No, but you must pay the tax on the 50% of the balance remaining in the SRS account.
2. Can you tell me more details about the withdrawal period?
The withdrawal period begins when you first withdraw the funds from the SRS account at the statutory retirement age. The period lasts 10 years. And after the period, you can still keep an SRS account, but you must pay the tax on 50% of the remaining balance in the account.
But the rule doesn’t apply to a life annuity because the payouts may outweigh the “10-year period” like a life annuity. In that case, you must pay the tax on the 50% of annuity payouts.
So is it worth investing in SRS? Yes, if you have a mid-to-long term savings goal, such as retirement, because of tax benefits. And no, if you opt for short-term gains and pull out your funds in a short time, an earlier withdrawal penalty may cut your gains and possibly lead to loss.
- SRS accounts reduce taxes payable, particularly for high tax brackets.
- SRS accounts accumulate wealth tax-free until withdrawal.
- SRS accounts have no investment restrictions but are subject to a bank’s approval.
- Contributions to SRS accounts are voluntary.
- SRS accounts provide an excellent option for long-term investors to make tax-free investments.
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