It is no secret that Singapore has one of the lowest income tax rate countries in the world.
But wouldn’t it be better if you could pay even less taxes and save more for the future? After all, a dollar saved is a dollar earned.
“So how?” you might wonder.
Today you will learn a government tax savings program called Supplementary Retirement Scheme. Here, we will cover what is SRS about, how to set it up, how much tax savings can you get and whether is it worth considering it.
So without further ado let’s start!
What is SRS Singapore?
The Supplementary Retirement Scheme (SRS) is a voluntary saving scheme that complements Singaporean’s CPF savings for retirement.
The Scheme is open to everyone living in Singapore. This means that Citizens, Permanent Residents and Foreigners are all allowed to open an SRS account. Other than to increase one’s retirement nest egg, contributing to the SRS account also allows you to reduce your income tax bill.The SRS provides two key tax saving benefits.
- Tax saving benefit on contribution
- Tax saving benefit on withdrawal
How You Can Benefit From Tax Savings Through Contribution & Withdrawal of SRS Funds
Contribution
When you contribute to your SRS account, your chargeable income will be reduced by the amount of your contribution.For example, if you have racked up $120,000 in chargeable income, your income tax bill will be $7,950 based on the progressive income tax rate by IRAS. If you choose to contribute $12,750 to your SRS account, your chargeable income will be reduced to $107,250 ($120,000 – $12,750) and your income tax payable will become $6483.75.
Here are how the numbers look like:
| Without SRS contribution | With $12,750 SRS contribution | |
|---|---|---|
| Chargeable Income | $120,000 | $107,250 |
| Income Tax | $7,950 | $6,483.75 |
| Tax saving | – | $1,466.25 |
Simply by contributing $12,750 to your SRS account, you will be able to reduce your income tax by $1466.25. That is the equivalent to a brand new laptop!
Although it sounds very enticing but please do note that there is a yearly contribution limit to your SRS account.
The latest Yearly Maximum SRS contributions are capped at $15,300 per year for Singapore Citizens and Permanent Residents and $35,700 for foreigners:
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Withdrawal
The second tax saving benefit for SRS occurs when you withdraw your money from the SRS account. Only 50% of the amount that you withdraw from your SRS account is taxable if the withdrawal is made after the retirement age (63 years old at the point of writing).
It is also important to take note that the SRS withdrawal can be spread across a maximum of 10 years to enjoy maximum tax saving benefit. (unless you have invested in an Annuity or Endowment Plan, you will then be able to withdraw for more than 10 years)
Below is the example given by IRAS. If you have $400,000 balance in your SRS account, the withdrawal plan and tax payable is as below. No tax needs to be paid as the tax rate is zero for the first $20,000 of each individual’s chargeable income.
How to Open an SRS Account?
Requirements: What do you need to open your SRS account?
The requirement is straightforward.
- Eligible to all Singaporeans, Permanent Residents (PRs) and foreigners
- At least 18 years old
- Not an undischarged bankrupt, not suffering from mental disorders
- Capable of managing your own affairs.
Who are the SRS operators?
An SRS operator is a bank that’s been approved by the Ministry of Finance to operate SRS accounts for Singaporeans.
You can open an SRS with any of these 3 bank operators:
You can register an account with any of them. It has little difference which bank you choose because you can invest in SRS approved assets from any institutions.
However, do note that you can only have 1 SRS account at any time. Opening an SRS account with multiple bank operators is an offence. You can however, choose to change your bank operator by requesting for a “transfer of account” form from your current bank operator.
Documents to prepare when opening an SRS account
When opening your SRS account, you’ll need to have your Identity Card or Passport on hand. If you’re a foreigner, you’ll need to complete a declaration form which will be provided.
How To Invest Your SRS Funds?
Investing in SGX listed securities like shares, STI ETF and REITs using your SRS funds is easy.
After you have created your SRS account, you just need to approach your stock brokerage to link up your accounts. Buying and selling stocks will be the same as what you would normally do on the online trading platform, except you have to tick the SRS checkbox to indicate your interest.
Additionally, there are a wide range of assets you can invest in.
Remember, you are not restricted to assets or products under your SRS operator. This means you can invest in UOB bonds, even when your SRS account is under DBS.
You can find more details of the above assets at the following SRS Operator’s websites too.
However, do note that the criteria for insurance is more complex. The following restrictions on insurance purchase via SRS were taken from the MOF’s SRS handbook:
- Only single premium products are allowed (including recurrent single premiumproducts, encompassing both annuity and non-annuity plans).
- Life cover (including total and permanent disability benefits) will be capped at 3 times the single premium.
- Plans can allow for a contribution continuation feature/benefit upon disability.
- Other types of life insurance e.g. critical illness, health and long-term care are excluded
- Trust nomination is not allowed for life insurance products purchased using SRS funds
You may find the full details here.
Should You Have a Supplementary Retirement Scheme (SRS) account?
The benefits of an SRS account sounds great right? So should you open a SRS account immediately?
Hold up, there’re a few key considerations you should make before opening your SRS account. Some of these could result in financial drawbacks too:
3 Things To Consider Before Contributing To Your SRS Account
#1 5% Penalty On Withdrawal Before Retirement Age
The Supplementary Retirement Scheme (SRS) savings are for retirement purposes. You should withdraw the money only after the retirement age. However, if you wish to withdraw the money before retirement age, 100% of the withdrawal amount will be taxable.
In addition, a 5% penalty charge will be imposed to your withdrawal. For instance, if you withdraw your SRS account by $40,000 when you are 61 years old, you will be subjected to additional taxable income of $40,000 and also a $2,000 penalty charge.
- # 10-year penalty-free retirement withdrawal period starts from age 62 (i.e. YA 2025 to YA 2034).
- * As the withdrawal at age 61 is an early withdrawal, 100% of the amount withdrawn is taxable. In addition, a 5% penalty is applicable.
- ^ Only 50% of the withdrawal amount is regarded as taxable income as he withdrew the amount after attaining the age of 62 years.
Therefore, you must ensure that you have planned for your finances properly before you deciding to contribute to the SRS account.
There are specific circumstances where you are allowed to withdraw your money from the SRS account before retirement age with no penalty charge. Here are some of the common types of withdrawal, table taken from IRAS.
| Type of withdrawal | Amount subject to tax | 5% penalty imposed? |
|---|---|---|
| Withdrawal on or after prescribed retirement age (withdrawal can be spread over 10 years from the date of first penalty-free withdrawal) |
50% of withdrawal sum | No |
| Withdrawal on medical ground (e.g. physical/mental incapacity; partial withdrawal on grounds of terminal illness) |
50% of withdrawal sum | No |
| Withdrawal in full due to terminal illness | 50% of full withdrawal sum less an exempt amount of up to $400,000 | No |
| In the event of bankruptcy | 100% of withdrawal sum | No |
| Withdrawal in one lump sum by a foreigner (with at least 10 years holding period) | 50% of lump sum | No |
| Early withdrawals before prescribed retirement age | 100% of withdrawal sum | Yes |
#2 Direct property investment is not allowed
Currently, IRAS does not provide a list of approved investment products. You will need to check with your SRS operator for the investment instruments that is allowed. Generally, there are not many restrictions on the use of money in the SRS account; you are free to invest in almost any instrument of your choice.
However, direct property investment is strictly not allowed using your SRS funds. If you are planning to purchase a property in the near future, you should not open an SRS account.
#3 You might potentially pay more tax on withdrawal…
The last but the most important point to take note is that you may end up paying more tax if you contribute to your SRS account at the wrong time! The concept is pretty easy to comprehend but the calculation can be tedious and complex.
It goes like this.
If you contribute to your SRS account at your early age, your SRS account will grow to a big amount when you are retired. You will receive tax saving benefit from your contribution to SRS account.
However, during the withdrawal period after retirement, you may ended up withdrawing a large amount of money and hence be required to pay the correspondingly high income tax. Even though only 50% of the withdrawal amount is taxable, large sum withdrawals will still put you in an expensive tax bracket.
Therefore, even though the SRS can potentially allow you to save tax, the timing of when you should contribute to SRS account is critical. There is an optimum age when you will benefit the most for contributing to your SRS account. Generally, the optimum age will be around 40-45 years old.
Do note however, that this optimum age vary from person to person. The following factors will affect your optimum age:
- Your age
- Your estimated income growth rate
- Your income tax bracket
- Your estimated investment return
- Your estimated inflation rate
To compute the optimum age is rather difficult, I have developed a calculator just for that. You can download my calculators here.
Quick Conclusion
The Supplementary Retirement Scheme (SRS) will definitely provide you with tax saving benefits. However, it is crucial to know when you should contribute to your account. If not, you might end up paying more tax in the future.
Lastly, you may like to consider the investment options available, after you have deposited money into your SRS account since most cash balance account offer scant interest rates which would not be sufficient to meet the inflation rate.
You definitely would not want your money to lose its value due to inflation after holding it for considerable period.
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