Supplementary Retirement Scheme (‘SRS’) Account
Unlike the previous recommendations by Heartland Boy, namely,
- Transfer from Central Provident Fund (‘CPF’) Ordinary Account (‘OA’) to Special Account (‘SA’) and
- CPF Retirement Topping-Up Scheme
this recommendation of utilizing the SRS Account requires a little bit more effort. This is because this is a voluntary scheme and not a compulsory scheme such as the CPF. One has to first apply for a SRS Account with any of the 3 authorised local banks – DBS, UOB or OCBC. Nonetheless, Heartland Boy assures you that this little effort is worth your time as the SRS Account is not just a useful tool to boost your retirement planning, but also a valuable tool to minimize your tax expenses. Here is his review of the SRS Account where all Singaporeans, Permanent Residents and Foreigners are eligible to apply for.
What Is The Supplementary Retirement Scheme (SRS)?
The Supplementary Retirement Account (‘SRS’) is a savings scheme that complements your CPF savings for retirement. It was introduced in 2001 by the government with the primary objective of encouraging the population to save more for retirement. With greater awareness and publicity, take-up rates of the SRS have increased in recent years. To incentivise the public to sign up for this voluntary scheme, the government has dangled the tax relief carrot. (more on that later)
How the Supplementary Retirement Scheme Works
In all honesty, it is not easy to explain the workings of the SRS Account in a single article. In essence, Heartland Boy thinks that the Supplementary Retirement Scheme has 3 sequential mechanisms:
Contribute, Invest, Withdraw
- If the account holder is a Singaporean, he or she can voluntarily contribute cash into it but the contribution is capped at a maximum of S$15,300 per annum. (Note that the Contribution Cap can change anytime, depending on a variety of factors). Note that SRS is also eligible to Singapore permanent residents or foreigners who earns an form of income in Singapore. Their eligibility, contribution and withdrawal criteria could be different from those of Singaporeans.
- This contribution earns 0.05% per annum. However, account holders who have a more aggressive risk profile can invest the contribution into higher yielding financial products such as fixed deposits, stocks and unit trusts etc. Naturally, all sale proceeds from the financial products must be returned to the account.
- Upon age 62, the account holder can apply to start withdrawing the money from his SRS Account over a 10-year period to tide him over his golden years. However, do note that 50% of the funds withdrawn upon retirement would be subject to income tax. For example, if $S50K is withdrawn, only S$25K will be added to your chargeable income for that assessment year.
Diagram 1: Flow Chart of how the SRS Account works
Advantages of SRS Account
For obvious reasons, the greatest advantage of the SRS Account is that it reduces income tax expense. Every dollar deposited into your account reduces your taxable income by a dollar. For instance, you save S$ 1,553 in income tax (11.5% X S$15,300) if your assessable income falls under that tax bracket.
Disadvantages of SRS Account
If you withdraw your funds before reaching age 62, 100% of the funds withdrawn will be subject to income tax. This will effectively negate all the tax relief that you have enjoyed earlier, ceteris paribus. In addition, a 5% penalty is also levied for such premature withdrawals. Therefore, readers should look to set aside an emergency fund first before looking to contribute to their SRS Accounts.
Some people may still baulk at the fact that 50% of the funds withdrawn after age 62 would still be subject to income tax. However, it is actually possible to achieve a scenario whereby none of your withdrawals is taxed. Assuming you are retired and have no income from employment by age 62, you will not pay any income tax if you keep your yearly withdrawal within the non-taxable bracket of S$20K. Therefore, it is possible to accumulate up to S$400K in your account by age 62, and start withdrawing S$40K per annum over 10 years. This scenario is illustrated in the diagram below.
Diagram 2: Withdrawal from SRS Account with NO Income Tax Paid
Theoretically, this S$400K can be an even bigger sum depending on the tax relief circumstances for that year. For instance, the scenario illustrated above does not take into account spouse relief, qualifying child relief etc.
Heartland Boy Enjoyed Tax Relief via SRS Account
Heartland Boy opened his SRS Account last year after he read about it on financial websites. It was a super fuss free event as his application was approved online via DBS Internet Banking. He then proceeded to contribute the money by transferring the money from his DBS Account. He subsequently enjoyed dollar for dollar tax relief this year.
Diagram 3: Heartland Boy enjoyed tax relief from his SRS Account
In addition, he proceeded to link his DBS Vickers trading account with his SRS Account. This allowed Heartland Boy to use the contribution to invest into STI ETF. He made the investment in January this year when STI plummeted to 2700 points. This investment is currently sitting on gains of 11%, much better than the paltry interest rate of 0.05% offered by SRS Account. After witnessing the success of Heartland Boy’s SRS journey, an envious Heartland Girl decided to open her own account too!
Open SRS And Enjoy Year-End Promotions
As an additional tip, these local banks often run year-end promotions to vie with each other to be the best SRS Account operator in Singapore. So take advantage of the freebies given out by the banks (OCBC, UOB, DBS) who are permitted to operate SRS Accounts.
SRS Complements Your Retirement Funds
Young adults should definitely view the Supplementary Retirement Scheme Account as a complementary pillar in their retirement plans. This is in addition to the main pillar that is the CPF LIFE. There is even a nice buffer between the various payout stages, i.e. CPF funds in excess of Full Retirement Sum from age 55, SRS funds from age 62 and CPF Life Payouts from age 65 onwards. Receiving payouts from both CPF LIFE and SRS in one’s golden years sound like a very good idea to Heartland Boy. Indeed, it may not be a bad idea to swallow the bitter pill now and set aside some cash annually to grow it.
*All information is accurate as at time of writing (10 July 2016).
P.S. Find out how Heartland Boy is taking advantage of CPF’s 6% interest rate for his parents’ retirement accounts.