What is the Supplementary Retirement Scheme?

|Posted by | Retirement Planning, Save Money

what-is-the-srs-main-minSingaporeans looking for a simple tool to help prepare for retirement should consider the Supplementary Retirement Scheme.  

The Supplementary Retirement Scheme (SRS) has been around for awhile, but many Singaporeans are still unclear about it. While it’s not the only retirement tool available to you, it’s best to keep up to date on these things; the SRS is one of the simplest options if you don’t want to get tangled in complex financial products:

What is the SRS?

The SRS is a voluntary scheme, in which you contribute money for your retirement. Yes, you already do this through your CPF contributions, but the SRS can act as a complement to it. We will discuss more on these contributions below.

The main advantage to SRS is that it gives you tax relief. Once you reach the age of 63, you can withdraw the savings from your SRS account. Only 50% of the withdrawal amount will be taxed.

SRS Helps You Pay Less Tax

In order to make sense of this, you need to understand how income tax works. Under the Inland Revenue Authority of Singapore (IRAS), we have a progressive tax system: the more you make, the higher your tax – this ensures richer people bear more of the costs for running the country.

Notably, there is zero tax for an income of S$20,000 per annum or below. You can see the chart on the IRAS website.

Now as we mentioned above, only half of the withdrawals you make from SRS are taxed. So if, at the age of 63, you are withdrawing S$30,000 per annum from SRS, you would normally pay a tax of S$200. However, because under SRS only half this amount is taxed, you would pay nothing (it counts as if your income is S$15,000 per annum instead of S$30,000 per annum).

SRS becomes especially significant as the income grows. Anyone with an income of S$40,000 per annum, for example, would pay a tax of S$550. If you earn truly large sums, the tax can reach up to a cap of 22%, which may amount to hundreds of thousands of dollars (or even millions for the super rich). But we don’t need to go to extremes for you to see the point: the SRS saves you having to pay tax dollars.

SRS Can be Used to Invest

Money put in your SRS can also be used for investments, in approved products such as unit trusts. This is broadly similar to the way your CPF monies can be invested. However, note that:

  1. The government will not replace any SRS funds that you lose via such investments, and,
  2. Any returns from these investments go into your SRS account, not your bank account or trading account. You will be unable to start withdrawing the money until the age of 63.

How Do You Contribute to SRS?

At present, only UOB, OCBC, and DBS/POSB can create an SRS account for you. Singaporean citizens and permanent residents can contribute up to S$15,300 per annum, while foreigners can contribute up to S$35,700 (yes, foreigners can open an SRS account too).

Note, however, that you will pay a stiff penalty if you attempt to withdraw the money before 63. You must pay a penalty of 5% of the amount withdrawn, and you will also be taxed on the full amount. As such, it is not advisable to contribute this money unless you are sure you have met immediate needs.

When Should You Contribute to SRS?

SRS is a good way to save money on taxes. However, because the money gets “locked” in the account for such a long time, you must make sure you are contributing money you can live without.

If you still have outstanding debts, such as personal loans or car loans, it makes more sense to use the money to pay these off first. Likewise, you should not skimp on essential products such as health insurance in order to put more into your SRS.

For the average Singaporean, the cost of being uninsured – as well as the interest rates on loans – more than exceed the tax dollars we would save with SRS. So do contribute if you can, but only after you’ve settled more pressing financial needs.

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By Ryan Ong
Ryan has been writing about finance for the last 10 years. He also has his fingers in a lot of other pies, having written for publications such as Men’s Health, Her World, Esquire, and Yahoo! Finance.