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 a Supplementary Retirement Scheme (SRS) Account?
The Supplementary Retirement Scheme (SRS) is a voluntary scheme introduced by the Singapore government in 2001 to encourage individuals to save for their retirement. This is particularly for those who are able and wish to save more than what is possible under the Central Provident Fund (CPF) system.
To encourage more Singaporeans to open an SRS account, the government offered tax benefits. Contributions to SRS are eligible for tax deductions, investment returns are tax-free, and only 50% of the withdrawals from SRS are taxable at retirement.
Here are some key points about SRS:
- Voluntary Contributions: Unlike the CPF which is a mandatory social security savings plan for working Singaporeans and permanent residents, the SRS is completely voluntary. You can open it voluntarily at DBS/POSB, OCBC, or UOB. As such, you will decide how much you want to contribute and when to make those contributions, subject to a maximum contribution cap.
- Tax Incentives: Contributions to SRS are tax-deductible, which means they can be deducted from your taxable income, subject to certain conditions. Note that you can’t contribute all of your income to SRS. There’s an SRS contribution cap of S$15,300 every year for Singaporeans and PRs.
- Investment Opportunities: Funds in your SRS account can be invested in a wide range of approved financial products, such as stocks, bonds, unit trusts, fixed deposits, life insurance products, and more. This can potentially provide higher returns than merely saving cash.
- Retirement Withdrawals: Withdrawals from the SRS are allowed from the statutory retirement age (currently 62 in Singapore) onwards. At this point, only 50% of withdrawals are taxable. Furthermore, if you withdraw your funds over a period of 10 years, you can spread out your tax liabilities and potentially pay less tax.
- Penalties for Early Withdrawal: Early withdrawal, such as before your retirement age, will be subject to a 5% penalty fee. On top of that, the entire amount withdrawn will be subjected to income tax.
Is It Worth Opening an SRS Account?
This will depend on your personal financial circumstances, your future income expectations, your retirement goals, and your ability and willingness to take on risk through investments. However, it is undeniable that contributing to an SRS account will give you a few benefits:
- Tax Advantages: One of the biggest benefits of an SRS account is the tax reliefs. Contributions to an SRS account are eligible for tax deductions, reducing your taxable income. This is extremely attractive for those with significant chargeable income.
- Invest to Grow Your Retirement Funds: Not only are contributions to the SRS tax-deductible, but the investment returns from SRS investments are also tax-free until they are withdrawn. This allows your investments to grow and compound without being taxed along the way.
- Partial Tax Exemption at Withdrawal: At the statutory retirement age (currently 62 in Singapore), you can start making withdrawals from your SRS account. Only 50% of the withdrawals are taxable, which means half of the amount you withdraw is tax-free.
- Investment Options: 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.
- Flexible Contributions: There is no mandatory contribution schedule for the SRS. You can contribute any amount you wish (up to the S$15,300 yearly cap) at any time. This offers flexibility according to your personal financial situation and goals.
- Encourages Long-Term Saving and Investment: The structure of the SRS promotes long-term saving and investing, as early withdrawal incurs penalties. This can be a benefit if you’re looking to build disciplined long-term saving habits.
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.
(Source: IRAS)
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):
Example 1
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%.
Example 2
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.
Example 3
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.
4. Stocks
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.
Read also: Which investing choice is better for you, ETFs vs Unit Trust? and Best Retirement Plan Singapore
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.
3. Which SRS Account Is Better?
Planning to open a Supplementary Retirement Scheme (SRS) account? You can do so at one of these major local banks in Singapore: DBS/POSB, OCBC, or UOB.
The features and benefits of SRS accounts between these three banks are largely similar due to regulatory standards. Plus, contributing to your SRS account works pretty much the same way. However, some factors may vary, including the user interface, customer service, and the range of investment options available.
Currently, there are no SRS account promotions from all three banks.
4. When Can I Withdraw My SRS Account?
Contributions to SRS are eligible for tax relief and can be withdrawn without penalty from the statutory retirement age that was prevailing at the time of your first SRS contribution (currently 62 years old).
You can spread your withdrawals over a period of up to 10 years to minimize taxes. If withdrawals are made before the statutory retirement age, they will be subject to a 5% penalty and 100% of the sum withdrawn will be subject to income tax. There are exceptions for cases such as death, medical grounds, and bankruptcy, where the 5% penalty will not apply.
Bottom Up
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.
Key takeaways
- 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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