Making SENSE of the Supplementary Retirement Scheme

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Many of us want to retire comfortably. To accumulate our nest egg, we may have placed our money in products like fixed deposits, life insurance policies or other investments.

Did you know that you could enjoy some tax advantages in this process? This article takes you through what the Supplementary Retirement Scheme (SRS) is about, and the tax benefits available if you choose to save for your retirement via this scheme.

 

What is the SRS?

It is a voluntary savings scheme introduced by the Government to encourage individuals like you to save more for retirement, above what you contribute to the Central Provident Fund (CPF).

 

Benefits of participating in the SRS

The SRS offers several tax benefits. First, you do not need to pay tax on your SRS contributions until you retire. You get a tax relief each time you contribute. This tax relief is automatically deducted off your income when IRAS assesses your tax, based on information provided by the SRS operators. 

Second, when you withdraw your SRS savings after the statutory retirement age (currently at 62), only 50% of your withdrawals are taxed. 

 

Through this tax deferral, you are likely to pay less tax in total because many people fall into a lower marginal tax bracket after they reach retirement age compared to their prime career period. 

 

Third, you can enjoy further tax savings if you choose to stagger your withdrawals over the period of 10 years instead of withdrawing all your savings in a lump sum.

 

How much tax savings can I have? This depends your annual income and how much you contribute to your SRS account. On the latter, note that there is a cap on how much you can contribute in any one year – $11,475 (for Singapore Citizens and Permanent Residents) or $26,775 (for foreigners). For example, if you currently earn an annual income of $75,000 and contribute $11,475 to your SRS account, you will save $975 in taxes for that year. This is almost 40% of the taxes that you would have paid otherwise. If you currently earn $120,000, you will save $1,606 in taxes. Tax relief at the point of contribution
	Example 1	Example 2
Total Earned Income	$75,000	$120,000
	Without SRS	With SRS	Without SRS	With SRS
Personal Reliefs - Earned Income - CPF - SRS	($1,000) ($15,000) -	($1,000) ($15,000) ($11,475)	($1,000) ($15,300) -	($1,000) ($15,300) ($11,475)
Chargeable Income	$59,000	$47,525	$103,700	$92,225
Tax Payable	$2,515	$1,540	$7,618	$6,012
	Tax savings of $975	Tax savings of $1,606
At retirement, you can enjoy further tax savings if you stagger your SRS withdrawals. For example, if you have accumulated $860,000 of SRS savings and withdraw it in a lump sum, you would pay $64,700 in taxes. However, if you stagger your withdrawals over 10 years, you would pay only $1,155 in taxes each year, or $11,550 over 10 years. Tax Concession for Withdrawals after Statutory Retirement Age
	Lump sum withdrawal	With steady withdrawal over 10 years
Withdrawal amount	$860,000	$86,000 (assuming no further returns earned)
Taxable amount	$430,000	$43,000
Taxes to be paid	$64,700	$1,155 per year (or $11,550 over 10 years)
Note: SRS withdrawals are assumed to be the only source of income for the person.

Is the SRS suitable for me?

The SRS is intended to help you save for your retirement. If you choose to withdraw your savings earlier than the statutory retirement age, you will have to pay tax on the full withdrawal and a penalty of 5%. Therefore, when considering whether to participate in the SRS, you should review your financial circumstances to ensure that you do not need to draw on your SRS savings until you reach the statutory retirement age.

 

How do I participate in the SRS?

You can open an SRS account in person at any branch of the Government-appointed SRS operators, as long as you are above the age of 21 and not an un-discharged bankrupt or of unsound mind. Currently, the three SRS operators are DBS, OCBC and UOB. 

 

You can decide when and how much to contribute, up to a maximum of $11,475 (for Singapore Citizens and Permanent Residents) or $26,775 (for foreigners) each year.

 

What can I invest my SRS savings in?

The SRS savings in your account can be invested in a variety of financial products, including those offered by financial institutions (product providers) other than your SRS operator. You should note however that the SRS scheme does not guarantee any specific rate of return on your investments. Your actual returns will depend entirely on the investment choices you make. Direct property investments are not allowed and certain life insurance products are subject to restrictions.

 

Example

Suppose you start contributing when you are 30 years old and save up to the contribution limit of $11,475 each year until you turn 62.

 

If you achieve a 5% annual rate of return through your investment choices, your savings could grow to $860,000 in your SRS account by the time you turn 62. However, if the performance of your investment is not favourable, you may incur losses.

 

In comparison, if you had kept your money in a savings account that offers an interest rate of 0.5% per annum, you would have accumulated about $400,000.

 

Changes to the SRS after 1 Oct 2008

To further enhance the SRS scheme, several changes were announced during Budget 2008 and have taken effect from 1 Oct 2008. 

 

The contribution age limit has been removed so that those who wish to work longer and continue to save through the SRS can do so. Previously, you were not allowed to contribute to the SRS account beyond the age of 62. 

 

You no longer need to earn an active employment income in order to contribute to the SRS. This will allow more people such as housewives who might be earning a passive rental income to benefit from the scheme. 

 

Employers are able to make SRS contributions to their employees’ accounts and enjoy tax deductions for these contributions. Employees will in turn qualify for tax relief on the amounts contributed to the SRS on their behalf. This change will be especially attractive to employers who wish to differentiate themselves from others and provide retirement benefits that go beyond what is mandatory under the CPF.

 

The Ministry of Finance provided a one-off concession for members aged 62 or above, which ended on 31 Dec 08 so that you can take advantage of the new rules. More details on this and the SRS in general can be found at the MOF website or from the SRS operators.

 

This article is prepared in collaboration with the Ministry of Finance.

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