Thinking of contributing to the Supplementary Retirement Scheme (SRS) to enjoy tax reliefs while building up another source of retirement savings? Here are some pros and cons you may wish to keep in mind when making your decision.

What are the benefits of contributing to SRS?

1. An additional source of retirement income

In addition to the tax incentives that come with making SRS contributions, you are also contributing more towards your retirement nest egg. Most people underestimate their expenses during retirement. When every day is a holiday, we need to set aside a more realistic amount for our monthly financial needs.

CPF is designed to provide a foundation for retirement. For those who wish to enjoy a quality lifestyle similar to when they were working (pre-retirement), the CPF LIFE payouts will likely be insufficient to meet their desired needs. By participating in SRS, the withdrawals starting from the statutory retirement age can be used to supplement one’s retirement expenses.

2.Immediate and long-term tax savings

Tax reliefs are the most notable benefits of SRS. Singaporeans, PRs and even foreigners are eligible for SRS.

Yearly contribution cap:

• Singaporeans and PRs: $15,300 SGD
• Foreigners: $35,700 SGD 

When you withdraw the SRS money after the statutory retirement age, only 50% of funds withdrawn is taxable.

Tip: Spread out your withdrawals and you can potentially pay zero taxes! For example, if in a given year, you were to withdraw $40,000 SGD, $20,000 SGD is subject to tax. But if you do not have any other personal income, this would be tax-free as the first $20,000 SGD of personal income in Singapore is not taxable. Before funding your SRS account, you owe it to yourself to do the math. Learn more about SRS in this article “Is The Supplementary Retirement Scheme Worth Your While?”.

3.Withdrawals are penalty-free upon reaching statutory retirement age

As of 1st July 2022, the statutory retirement age has been raised to 63. Prior to 1st July 2022, it was age 62. If you were to make a withdrawal before the statutory retirement age prevailing at the time of your first contribution, 100% of the withdrawn amount is subject to tax and there is also a 5% penalty.

Withdrawing your SRS funds before the statutory retirement age is penalty-free under the following exceptional circumstances. The 50% tax concession will apply to withdrawals in these scenarios.  

• Death
• Medical grounds (physical or mental incapacity)
• Terminal illness
• Bankruptcy or 
• Full withdrawal of the SRS balance by a foreigner provided that these conditions are met:
• neither a Singapore Citizen nor a Singaporean PR on the date of withdrawal and for a continuous period of 10 years preceding the date of withdrawal
• maintained the SRS account for a period of 10 years or more from the date of first contribution to the SRS account and
• make a one-time full withdrawal from the SRS account.

4.Freedom to invest in a variety of instruments, from low risk to high risk

A wide range of financial instruments are available for your SRS investments. The list include:

• Fixed deposits
• Bonds
• Singapore Government Securities, including Singapore Savings Bonds (SSBs)
• Stocks
• Exchange traded funds (ETFs)
• Unit Trusts
• Annuities
• Single premium insurance products, including endowment plans

Tip: 

Start your investing journey early. The longer you invest, the more time your investments will have to compound and grow. SRS is a good tool to instil investment discipline and a long-term investing mindset, as early withdrawals are penalised.

5.Investment gains are tax-free unless you withdraw

You get to accumulate tax-free returns on your investments till the time you withdraw the money. Additionally, here are some pointers to note:

• Not all withdrawals have to be made in cash
  You can consider making non-cash withdrawals by transferring the investment out of your SRS account and into, for example, your personal Central Depository (CDP) account. This option allows you to avoid liquidating your SRS investments and also allows you to hold your SRS investments outside of the SRS scheme, particularly important during times when markets are down.
  
  However, this is only applicable for the following types of withdrawals, which qualify for the 50% tax concession:
  
  – Withdrawal on or after the statutory retirement age prevailing at the time of an SRS member’s first contribution
  – Withdrawal on medical grounds
  – Withdrawal in full by a foreigner who has maintained his SRS account for at least 10 years from the date of his/her first contribution
  
  
• There are also exceptions to these investment withdrawals. The following withdrawals can only be in cash:
  
  – Withdrawals on the grounds of bankruptcy
  – Withdrawals before the statutory retirement age
  – Withdrawals of contributions in excess of the SRS contribution cap
• •  

What are the disadvantages of SRS?

1. Withdrawal restrictions

• You can only withdraw penalty-free if you are withdrawing at the set statutory retirement age when you make your first contribution. 
• If you withdraw before this age, you will need to pay a 5% penalty on the amount withdrawn and you will pay taxes on 100% of the withdrawal (not 50%!). 
• Refer to point 3 above for scenarios where withdrawals are penalty-free. 

Tips: 

• Before you contribute to SRS, take time to review your cash flow, balance sheet and commitments. 
• Do you have a long term time horizon such that you would not need to withdraw the money? Given the lock-in period, you should ensure you have sufficient funds set aside for other life emergencies. Your SRS savings is intended to be held for long-term retirement purposes. 
• Also, any amount that you contribute to SRS annually counts – you do not necessarily need to hit the limit.

2. SRS contributions made cannot be refunded

3. Low interest rate

The interest rate of SRS accounts is fixed at 0.05% per annum. If you do not invest the funds, you are better off keeping the money in cash and avoid locking it up for decades. If you contribute $15,000 SGD per annum and you keep it in cash, you will have $300,000 SGD after 20 years. But if you were to invest the savings at 5% net returns per annum, you will have $500,000+ SGD after the same 20 years!

4. Investment profits can be taxed at withdrawal

If your investments earn you profits, the profits are subject to tax at withdrawal because it is treated as part of the SRS withdrawal amount. Bear in mind that 50% of each withdrawal you make will be taxed and this includes the returns on your investments. As we do not pay taxes on capital gains or dividends/interest on financial investments, this is actually a worse-off tax treatment.

That being said, it still makes sense to participate in SRS because of the tax advantages.

Additionally, you can strategise your withdrawals over a period of ten years (maximum) to reduce your tax exposure, and you should withdraw in years where you have as little as possible other taxable income.

Read my other article Is The Supplementary Retirement Scheme Worth Your While? to find out if SRS is suitable for you. If you would like to learn more about what you can do better to secure your retirement, call me at +65 6252 8500 or schedule a consultation with me.