You know how we Singaporeans love to complain about our CPF? How we don’t believe that we’ll ever see our money again? If you’re someone who thinks CPF is really just one giant scam… this article isn’t for you. This is for people who just have way too much money and are looking for a way to set it aside in a retirement account and get something back for doing so. This article is about the Supplementary Retirement Scheme and whether it makes any sense for you to get on it.
1. What is the Supplementary Retirement Scheme?
It’s a savings scheme that’s supposed to encourage you to save for retirement. You can choose to contribute to Supplementary Retirement Scheme every year and get tax relief. The entire Supplementary Retirement Scheme (SRS) contribution is tax-deductible.
2. How much can you contribute to SRS?
For now, the maximum you can contribute each year is $12,750 for Singapore Citizens and PRs, while foreigners can contribute up to $29,750. In 2016 and beyond, because the CPF Salary Ceiling has increased, the maximum SRS contribution is increased to $15,300 for Singapore Citizens and PRs and $35,700 for foreigners.
3. What are the benefits of SRS?
Mainly, it’s to enjoy tax-relief. You can also use your SRS funds to invest in several options including shares, REITs, ETFs, insurance and unit trusts. Similar to investing your CPF funds, however, the returns on your investments funded by your SRS will return to your SRS account.
The good news is, your investment gains will accumulate tax-free. When you withdraw your savings once you reach the prescribed retirement age (currently set at 63 years), you will only be taxed on 50% of the withdrawal amount as taxable income.
That means, if you have no other taxable income (say, from employment or rental), you can withdraw up to $40,000 a year from your SRS account without paying any tax. Why? Because only 50% or $20,000 will be considered taxable income, and there is no tax on annual incomes $20,000 and below.
4. So, what’s the catch?
Because it’s a voluntary scheme, you can withdraw funds from your SRS account at any time. However, if you withdraw any amount before the prescribed retirement age, 100% of withdrawn amount will be taxed. Furthermore, you will be charged a 5% penalty, just to drive home the message that you shouldn’t touch your SRS account until retirement.
In fact, the only exceptions that don’t get penalised for withdrawing your SRS funds before retirement age? If you’re dead. If you’re physically or mentally unable to remain employed. If you declare bankruptcy. I don’t know about you, but I’d rather be knocking on wood and praying non-stop, than hoping I get to withdraw SRS funds without penalty.
5. Is SRS worth your time?
Well, it all depends on your income. The first $40,000 you earn each year will incur gross tax payable of up to $550. The next $40,000 you earn on top of that? You’ll be taxed 7% or up to an additional gross tax payable of $2,800. And if you earn more than $80,000 each year? Your tax rate on any income above $80,000 is anything from 11.5% to 20%. By 2017? It goes up to 22%. Now, that’s REALLY gross.
For example, if you’re a Singaporean Citizen or PR earning more than $40,000 a year, contributing the maximum of $12,750 to SRS could save you between $892.50 and $2,550 in tax relief each year. That’s pretty substantial. Of course, you don’t have to contribute the maximum amount. Ideally, you should just set aside enough to drop you to a lower tax bracket.
6. So, who is SRS really meant for?
Not surprisingly, more than half of SRS account holders in 2014 were between the ages of 36 and 55. There are two reasons for this. Firstly, these are the people who probably have started earning at least $40,000 a year, so for them, any amount of tax relief will be significant. Secondly, it is also around this age that most people start seriously planning for their retirement, once they’ve settled their housing needs.
For this group of people, if you’re already planning to invest a portion of your income for retirement purposes, then consider putting it into your SRS account. Not only will it help you save some money through tax relief for your initial contributions, your investment returns will also not be taxed until they are withdrawn from your SRS account. Of course, like most other investments, there is no guaranteed rate of return on investments made with your SRS funds.
However, if you haven’t started earning more than $40,000 a year, or you have more urgent things to spend your income on, like home loans, car loans or insurance premiums, then don’t bother with SRS. You definitely need to prioritise where your money is going, and it doesn’t make sense to plan for tomorrow’s retirement if you’re in danger of losing your house today.
7. How do we sign up for SRS?
You can open an SRS account with any SRS Operator. Right now, the three are DBS, UOB or OCBC. When it comes to the interest on the cash balance, it’s pretty much standardised at 0.05% for all of them. However, do note that there each SRS Operator will have access to different investment instruments for investing, and that their fees and charges may differ.
What do you think? Is the Supplementary Retirement Scheme a waste of your time and money? We want to hear from you.