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.
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:
When you withdraw the SRS money after the statutory retirement age, only 50% of funds withdrawn is taxable.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to make a withdrawal before the statutory retirement age prevailing at the time of your first contribution, 100% of the withdrawn amount is subject to tax and there is also a 5% penalty.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.
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:
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:
1. Withdrawal restrictions
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.
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