The Supplementary Retirement Scheme (SRS) is a savings scheme that seeks to encourage you to save more for your silver years. Contributions to the SRS are voluntary and are made over and above your CPF contributions.
Besides setting aside more money for the retirement years, the main benefit of the SRS comes in the form of tax relief: your yearly contributions to the SRS are tax deductible; investment returns are tax-free before withdrawal, and only 50% of your withdrawals from the SRS are taxable at your retirement (currently set at 62 years of age). Although this sounds like an attractive proposition, does it make sense for everyone to start contributing to the SRS?
To start contributing to the SRS you’ll need to meet the following requirements:
- Be at least 18 years of age;
- Not be an undischarged bankrupt;
- Not be mentally disordered;
- Be capable of managing yourself and your affairs
With these requirements met, you can apply for an SRS account via 3 private operators: DBS / POSB, OCBC and UOB.
Once you have an SRS account, you could park your money in the account to earn a meagre interest (0.05%), or you can invest the money in instruments such as shares, bonds, REITs and insurance amongst others.
Now that you’re familiar with the basics, let’s get into how the SRS can work for you.
Contributions and tax relief
From 2016 onwards, the maximum contribution for Singaporeans and Singapore Permanent Residents (SPR) is $15,300 per year. This is calculated by using 15% of your Absolute Income Base (defined as 17 months of your monthly CPF salary ceiling):
15% * (17 x $6,000) = $15,300
This amount is deductible from your taxable income which is shown together with the income tax rate and gross tax payable in the table below.
Resident Income Tax Rates for Year of Assessment 2016 (YA2016)
|Taxable Income ($)||Income Tax Rate (%)||Gross Tax Payable ($)|
With the above table as a reference, let’s assume you’re 32 years old and take home $40,000 annually. In this scenario, your tax payable is $550. If you decide to make the maximum contribution of $15,300, your taxable income and tax payable would be:
Taxable income: $40,000 – $15,300 = $24,700
Tax payable: $0 + 0.02 * $4,700 = $94
This represents a yearly tax savings of:
$550 – $94 = $456
If you invest your yearly tax savings at an annual rate of 7% until you retire at age 62, you can expect to build quite a tidy sum. Using the following formula to find the future value a time series, you can calculate the total balance after 30 years. :
Future Value = PMT* (((1+r/n)^nt-1) / (r/n))
PMT = the monthly payment
r = the annual interest rate (decimal)
n = the number of times that interest is compounded per year
t = the number of years the money is invested or borrowed for
Putting the figures into the formula:
Future Value = $456 * (((1 + 0.07/1)^30-1 / (0.07/1))
Future Value = $456 * (1.07^30 / 0.07)
Future Value = $43,074.12
Now, if you keep making the maximum SRS contribution each year up to your retirement age, and assuming you also invest your SRS funds at a 7% annual interest rate, we can use the formula above to find out how much you’ll have in your SRS account when you retire.
Future Value = $15,300 * (((1 + 0.07/1)^30-1 / (0.07/1))
Future Value = $1,445,250.03
In the table below, we show you how much you can expect to receive if you invest your tax savings as well as your SRS funds at various interest rates.
|Annual Interest Rate||3%||5%||7%||10%|
|Future Value of SRS ($)||727,903.86||1,016,514.37||1,445,250.03||2,516,758.55|
|Future Value of Tax Savings ($)||21,694.39||30,296.11||43,074.12||75,009.27|
Upon retirement, you can only withdraw your SRS funds over a stipulated maximum period of 10 years. At the end of the 10th year, your SRS account will be deemed closed and 50% of the remaining funds will be taxable.
If you spread the withdrawals from your SRS account evenly over 10 years, and only 50% of your withdrawals are taxable, your taxable income each year amounts to:
Taxable Income = ($1,445,250.03 / 10) / 2
Taxable Income = $72,262.50
This results in a tax payable of $3,192.39 each year as shown by the calculation below.
Tax Payable = $550 + ($72,262.50 – $40,000)*0.07
Tax Payable = $2,808.38
This represents a substantial tax savings compared to a situation in which the full amount of your withdrawals were taxed.
Taxable Income = $1,445,250.03 / 10 = $144,525.03
Tax Payable = $7,950 + ($144525.03 – $120,000)*0.15
Tax Payable = $11,628.75
From the above, your total tax savings each year amount to $8820.38 ($11,628.75 – $2,808.38).
From the above scenario, you’ve seen how you can use the SRS to enjoy quite a substantial tax relief. It stands to reason that the amount of tax relief you stand to enjoy would be greater the more you earn given that higher income groups are taxed at a higher rate.
There is however, one thing you should note about the SRS. Although you can withdraw funds from your SRS account at any time, there is a penalty. If you withdraw your funds at any time before the prescribed retirement age, there is a 5% penalty fee and 100% of your withdrawal will be taxable. If you decide to withdraw your SRS funds before your retirement, the aforementioned results and calculations would be distorted. As such, the benefits of the SRS are only fully realised with a true investing – buy and hold – approach with minimal withdrawal”)
Should you put your money in the SRS?
According to Ministry of Finance statistics as of December 2014, 31% of SRS account holders are aged 36 – 45. This is not surprising as individuals in this age group would probably be earning above $40,000 and would stand to enjoy the benefit of tax relief offered by the SRS. It is also the age range in which individuals would most likely start planning seriously for retirement.
While it is beneficial to contribute the maximum amount to your SRS to generate the maximum tax savings, it may not be feasible if you have other current financial obligations. These could include repayments on your home or car loans, or insurance premium payments. In this case, you could consider contributing the minimum amount that would drop you to a lower tax bracket.
As your income increase over time, and you don’t have to prioritise your home or car loans, you could then consider increasing your SRS contributions to enjoy the full amount of tax relief.