The Supplementary Retirement Scheme (SRS) has been one of our government’s options for us to address our retirement needs since 2001. But is this a viable option for you? And if not now, when?
Introduction to SRS
Available through the 3 local banks (DBS/POSB, OCBC & UOB), SRS differs from CPF in 3 main ways:
1. SRS is a voluntary scheme;
2. There is no restriction on the amount of money in the SRS that can be used to purchase investment instruments;
Tax Reliefs
A major benefit of SRS is that account holders enjoy dollar-for-dollar tax relief, up to the maximum amount (currently capped at $15,300/ yr). However, whether the immediate tax relief is worthwhile will depend on:
1. What are the income tax savings;
2. What are the opportunity costs;
3. What are the penalties for early withdrawal;
4. What is the tax incurred when you eventually withdraw from the SRS.
1: What are your opportunity costs?
Depending on your current life stage, the opportunity cost of locking your money in the SRS may easily outweigh the income tax that you save.
If you are in your 20s/30s, is it more important for you to reduce your income tax, or will it be more important for you to be able to pay for your house renovation and household purchase without having to take a bank loan?
If you are in your 40s/50s, is it more important for you to reduce your income tax, or will it be more important for you to be able to pay for your children’s tertiary education (or loan them the money) so that they don’t have to take a bank loan before they even start working. What are your income tax savings?
Let us look at the most attractive point of the SRS – tax relief benefit. Although dollar-for-dollar tax relief may sound very appealing, but, when you consider your taxable income, your life stage and opportunity cost, it may not be the case anymore. Here are some points to note:
The higher your income, the more you benefit from the SRS’s tax relief because of our progressive tax rates as illustrated in Table 1.
If your total income is ≤$51,250, and your chargeable income is ≤$40,000, your maximum tax relief benefit will only be $456 even if you contribute up to $15,300 for your SRS. Many may find this to be insignificant or not worthwhile since you will only save $1 of income tax per $33.55 of contribution to your SRS.
If you want to use no more than $10 of SRS contribution to save you $1 of income tax, your chargeable income will need to be around $100,000.
2: What are your opportunity costs?
Depending on your current life stage, the opportunity cost of locking your money in the SRS may easily outweigh the income tax that you save.
If you are in your 20s/30s, is it more important for you to reduce your income tax, or will it be more important for you to be able to pay for your house renovation and household purchase without having to take a bank loan?
If you are in your 40s/50s, is it more important for you to reduce your income tax, or will it be more important for you to be able to pay for your children’s tertiary education (or loan them the money) so that they don’t have to take a bank loan before they even start working.
3: What are the penalties for early withdrawal?
Your chargeable income for that year will increase by the amount that you withdraw from the SRS. There will also be a 5% premature withdrawal penalty.
4: What is the tax incurred when you eventually withdraw from the SRS?
Though investment gains accumulate tax-free in the SRS, 50% of the withdrawals from SRS at retirement will be taxable. You must also fully withdraw everything in 10 years. What is the maximum amount one should contribute into SRS then? A simplified example is shown in Table 2.
Assume Singapore’s income tax rate and SRS relief both remain unchanged;
Your SRS only earns 0.05% p.a. nominal interest;
You do not have other sources of taxable income;
Withdrawals from your SRS are spread evenly throughout 10 years.
Bear in mind, the above contribution amount assumes your contributions to your SRS account are solely for tax relief benefit, and your SRS does not generate any returns from investment. So, if you do intend to invest using your SRS monies, the investment returns generated will be included as part of the $400,000.
At first glance, SRS seems like an attractive option to enjoy income tax relief. However, once you delve deeper and calculate your net tax relief, you may realize that the income tax you save may not be worthwhile for now in your younger years, or maybe not at all.
Should you wish to calculate whether SRS is beneficial for you, Chloe and her team will be happy to be of service.
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