What exactly is a Supplementary Retirement Scheme?
The Supplementary Retirement Scheme (SRS) is a voluntary savings program designed to motivate people to save money for retirement on top of their CPF savings. CPF funds are frequently used for the down payment and mortgage loan payments, therefore we may want to look into other options, such as SRS, to boost our retirement savings.
Tax deductions can be claimed for SRS contributions.You have the option to reach your SRS contribution ceiling before the end of each year and receive tax relief in the succeeding Year of Assessment.
The primary advantage of the SRS account for Singaporeans, PRs, and foreigners is the opportunity to reduce their taxable income. Every dollar you contribute to your SRS account is tax-deductible up to the contribution limit.
DBS, OCBC, or UOB are all good options for opening your SRS account, and all three offer the same low interest rate of 0.05% p.a.
How much money can you put into SRS?
The current annual contribution cap is $35,700 for non-Singaporeans and $15,300 for citizens and PRs of Singapore.
SRS tax relief can be obtained without indicating your tax return. Your tax relief will be automatically calculated by the bank handling the reporting for your SRS account, and the bank will submit the information directly to the government.
Please be aware that the maximum exemption for an individual’s income taxes is $80,000. Contributions to the Supplemental Retirement System (SRS) and other tax deductions, such as Working Mother’s Child Relief and charitable contributions, are included.
What advantages come with SRS contributions?
Reduce your taxable income
Before withdrawal, investment returns are tax-free, and only half of SRS withdrawals are taxable upon retirement.
You can protect the purchasing power of the money in your SRS account by investing it in stocks, real estate investment trusts, exchange-traded funds, index funds, Singapore savings bonds, unit trusts, or endowment insurance policies, all of which have been approved by the Singaporean government.
The best part is that your investment gains will not be taxed. Investing SRS money works the same way as investing CPF money; the money you make back goes into your SRS account. After reaching the standard retirement age (currently 62), you’ll only have to report half of your withdrawal as income for tax purposes.
What this means is that you can withdraw up to $40,000 each year tax-free from your SRS account as long as you don’t have any other taxable income (such as salary or rent). Why? Since only half of your income will be considered as taxable income, you won’t get owed tax for annual income of $20,000 or less.
Contributions are flexible
Each SRS participant is free to make any contribution they want. For Singaporeans and residents, the SRS contribution rate is 15% of the income base (capped at $15,300), whereas it is 35% (capped at $35,700) for foreigners.
The potential for your SRS to grow and provide more retirement income
Your SRS account balance will not only save you taxes, but it also has the potential to grow. Shares, unit trusts, real estate investment trusts (REITs), exchange traded funds (ETFs), and insurance policies (i.e. endowments) are all good options for your SRS investment portfolio. If you’re thinking about starting an endowment, you need to make sure your money is safe. It is also recommended that you plan for many retirement income streams.
What are the rules for withdrawal?
- There are withdrawal requirements to follow because the SRS is intended to be a source of retirement income for us in our later years.
- If you take any amount before reaching the statutory retirement age (now age 62), the entire amount is taxed. In addition, there will be a 5% penalty added to your total. If you withdraw $40,000, for instance, you’ll owe a $2,000 penalty.
- There will be income tax on half of the withdrawal amount if it is taken out before the mandatory retirement age owing to death or medical reasons. There won’t be any penalty.
- Withdrawals made prior to the statutory retirement age owing to bankruptcy will be liable to income tax on the whole amount taken out. There won’t be any penalty.
- You’ll be required to pay your full amount of tax on the entire sum plus a 5% penalty if you cash out before retirement age for any reason other than sickness or bankruptcy. The withdrawn sum will be included in determining your annual income tax liability.
- Withdrawals made after the mandatory retirement age will be exempt from taxation by up to half. If you take $40,000 out of your SRS account in a given year, for instance, just $20,000 of that amount will be considered taxable income. There will be no fees or penalties associated with the withdrawal.
What are the potential tax benefits of SRS?
The tax benefits are the primary incentive for contributing to an SRS account. You should only join the SRS if doing so will help you save money on taxes. The savings can add up to a sizable amount for those with an annual income of more than $40,000.
After you exceed the $40,000 yearly income threshold, you’ll see a sizable increase. Because of this, you should only think about opening an SRS account if your annual income is greater than $40,000.
Should you consider SRS?
It really depends on how much money you have. Gross taxation can go up to $550 per year on the first $40,000. The next $40,000 you make will be taxed at 7% or up to an extra gross tax of $2,800. Therefore, if you earn $80,000 per year and do not qualify for any other tax breaks, you may owe as much as S$3,350 in taxes. This means that if your yearly income is beyond $80,000, your tax rate will be between 11.5% and 22%.
Let’s consider a different income bracket, on the assumption that no other tax breaks apply. Assume you have a yearly income of SGD 120,000 as a Singaporean citizen or PR. The amount owed in income tax is $7,950. Taxes amount to $6,191 if you put the maximum of $15,300 into SRS. This amounts to a tax savings of $22%, or $1,760.
Those with higher taxable incomes have more to gain from making contributions to their SRS account because a bigger portion of their contributions will be tax deductible. Contributing the maximum amount is not required. The minimum amount you should put away is the amount necessary to get you into a lower tax bracket.
How soon do you anticipate needing access to a large chunk of money?
You should weigh the potential tax savings against your need for immediate cash. If you cash out your retirement savings before you turn 62, you’ll owe taxes on the full amount plus a 5% penalty. Therefore, if you have pressing or anticipated financial obligations, you should not make substantial contributions to SRS.
You should have a healthy emergency reserve established before starting to put money into SRS. You shouldn’t put money into a retirement account that you might need for an unexpected expense in the near future; rather, you should put money into a retirement account that you intend to withdraw for your own retirement.
Tips
Tip #1: Why you should register an SRS account right now
According to government data, the mandatory retirement age will be raised from 62 to 63 on July 1, 2022, then progressively to 65 by 2030. So, you may “lock in” your retirement age now by opening an SRS account and depositing $1. If you are unsure of how you will utilize your SRS account to help you save for retirement, it is not a good idea to put in more than that amount.
Tip #2: Why should you withdraw your SRS funds over ten years (from age 62 to 71) rather than in a big sum?
Save money by staggering! Spreading out your SRS withdrawals rather than taking the entire amount at once will help you pay less in taxes. You get to set the withdrawal amount and take it out over a period of 10 years. In retirement, you may owe nil or very little tax because you won’t be earning any money. Since the first S$20,000 of an individual’s chargeable income is not taxed, you might theoretically take up to S$20,000 a year, tax-free, over a 10-year period. To the extent that withdrawals exceed this threshold, additional taxes will be due the next calendar year.
Who gains the most from SRS?
SRS may be helpful for the following three demographics:
- Those who have recently entered the $40,000 income bracket would appreciate any reduction in their tax burden.
- Those who, after taking care of their housing requirements, can devote their attention to retirement planning.
- Those who are saving for retirement or intend to do so in the future. Not only will they be able to save money thanks to tax breaks, but they also won’t have to pay taxes on any investment gains until they withdraw money from their SRS account. Naturally, it’s not possible to guarantee a profit with this or any other investment.
Final Thoughts
An SRS contribution is a long-term investment. Consider the tax savings against the cost of locking in your money until age 62. Think carefully about the benefits and drawbacks of an SRS account before signing up.
If you choose to take part in SRS, your contributions must be invested or placed in a capital-guaranteed endowment insurance. If you don’t need the money right away, leaving it in your SRS account is the same as leaving it in a savings account that earns next to nothing.
It’s important to remember that the Supplemental Retirement Scheme is just one option among many for saving for old age. Get the assistance of a professional financial planner while developing a strategy for retirement.