Supplementary Retirement Scheme (SRS)

I have been contributing to the Supplementary Retirement Scheme (SRS) for a few years now. As the name suggests, the funds are really for my retirement, hence the catch is that I could not withdraw the funds from SRS till I reach the statutory retirement age (currently at 62).

Each year, Singaporeans and PRs could contribute up to $15,300 to their SRS, which is eligible for tax relief. Foreigners could contribute up to $35,700. Contributors could use the funds in SRS to invest in:

  • Equities;
  • Bonds;
  • Unit trusts;
  • Fixed deposits;
  • Insurance.

We can open SRS account with any of the three local banks: OCBC, UOB, and DBS. However it is not necessary to buy the above products using the SRS funds from the same bank. Both OCBC and UOB provide calculators on their sites to help you estimate the tax savings you could derive from SRS contribution:

Here are some screenshots I copied from the OCBC website:

As below, SRS contribution helps to reduce your taxable income.

srspic1

 

 

 

 

 

 

 

 

 

 

 

 

Assuming $60k annual income, and zero personal relief, and full contribution of $15,300:

srspic2However, do note that some young parents already have sufficient personal reliefs to offset the full tax amount. Then, there is no incentive to contribute to SRS. Also, low income earners might not incur income tax after personal reliefs and would not benefit from any tax savings.

I think it is important that we think about how we should use the SRS funds to invest before we make contributions to the SRS as the interest rate for the SRS account is very low. The aim is to grow the funds in SRS so that it could be part of our retirement cornerstone. Personally I use the SRS funds as part of my stock portfolio.

There were some changes to the SRS recently, and the below should be noted:

  • Contribution cap per year has been raised to $15,300 for Singaporeans and PRs;
  • At retirement age, SRS members could withdraw their SRS investments without liquidating them. Previously they could only be withdrawn in cash;

My plan is to start drawing down the investments from the SRS account over the maximum ten year period. Assuming that I have no other income at age 62, I could draw down $40,000 per year without attracting any income tax. Over a ten-year period, I could then draw down $400,000 tax free. Anything more than that, I would be attracting tax.

As the stocks that I buy with my SRS funds would be earning dividends, I figure that the sum would grow over the years on top of my contributions. Hence, I think I would watch the amount and try not to let the amount overrun $400,000 too much. It really depends on how long I remain in the workforce. Not too long, I hope. Also, even if the amount exceeds $400,000, only half of the amount is taxable, as any SRS withdrawals would enjoy 50% tax concession.

What if I need to withdraw the SRS funds for any reason? A premature withdrawal before the retirement age would incur a 5% penalty, unless the withdrawals are based on the grounds of:

  • death;
  • medical grounds;
  • bankruptcy;
  • full withdrawal of SRS balance by a foreigner who has maintained SRS account for at least 10 years from date of his first contribution.

For more articles like this, go to blog Financial Freedom Gal.