The world’s population has been aging and will accelerate the pace post the Covid-19. We will see fewer babies and more older people on the earth. More than that, technology improves the time length we live, and the probability more and more people will live up to 90 or above is higher after medical science advances. With fewer newborns, how should the new baby boomers, generation X and generation Z, prepare for their financial future with a longer lifespan?
Singapore has undergone some policy changes to accommodate the population boom and decline since the ’80s. In 2001, the Government established a supplementary retirement system(SRS) to address the domestic old age issue besides the Central Provident Fund(CPF).
Singapore citizens, permanent residents, and expatriates can participate in the voluntary system for their future retirement needs. SRS provides tax benefits concerning contributions, investment returns, and withdrawals. The Government encourages people in Singapore to plan, save and invest through the voluntary scheme during their working years.
What is the Supplementary Retirement Scheme (SRS)?
The Supplementary Retirement System(SRS) is government-sponsored, in addition to the CPF, encouraging local people and expatriates in Singapore to save and invest for future retirement. In response to low birth rates and the aging population, the Singapore government created the voluntary savings scheme by offering tax benefits to savers for accumulating SRS savings and investment gains for retirement. At the same time, the CPF mainly covers housing, medical, and frugal living.
SRS is a pure savings scheme assisting wage-earners, particularly taxpayers, to create retirement savings for use past their working years. You are free to make yearly contributions as the SRS contribution is voluntary. More than that, there are no restrictions on any investment made.
You may contribute up to S$15,800 a year to your scheme, and this limit is still subject to the cap of S$80,000 of the income relief of personal income assessment. You can decide when to pay within a taxable year: monthly, half-yearly, or yearly. But you have to contribute in cash only, and the contributions count towards remunerations if your employer pays for you into your SRS account.
The SRS scheme also specifies a contribution rate for participants. The current rate for local Singaporeans is 15% of an income base, and the maximum allowable income base for contributions is S$102,000.
You should make contributions by December 31 to claim the tax benefits in the following taxable year. Your SRS bank files your contributions for tax reporting, and you can spare the effort.
Regarding account withdrawal, you should withdraw your contributions and investment returns to enjoy tax benefits only on or after statutory retirement age(the current age is 62). The age requirement for withdrawal will not change for an existing participant even if the parliament may propose a change in retirement age. Participants should apply for account withdrawal in the current year before claiming tax benefits in the following year.
You may pay less tax by subjecting to 50% of your withdrawal amount, including contributions and investment gains on or after the statutory retirement age. At that time, no penalty applies to withdrawals. However, you will pay full tax and a 5% penalty on a withdrawal amount if you take out the money before the retirement age bar. And you will be exempt from tax and penalty if the withdrawal is on medical grounds in some situations.
What are the Benefits of Having an SRS Account?
The benefits of an SRS account is multifold, arising from the tax relief arrangements:
1. Increase returns: More money will be available to invest when the SRS contributions are income tax-free. Likewise, investment gains are tax-free during the accumulation period, and more resources are accessible to investments. Participants have higher returns than other investors as a result. Moreover, contributors get only half tax from withdrawals on or after retirement age and have more money on hand.
2. Partial tax exemption: Scheme members can get tax benefits of 50% of a withdrawal amount based on medical reasons, death, or terminal illness conditions. Members with terminal illnesses may get tax benefits on 50% of a withdrawal amount after a tax-free sum of S$400,000.
3. Annuity payments: Scheme participants can receive annuity payouts, or the payouts stay in the SRS accounts without incurring a penalty of 5%. However, members will be subject to tax on 50% of payments if they withdraw funds from the accounts. Also, members have to pay tax for 50% of annuity payouts after the withdrawal period ends and the SRS account is closed.
4. Investments without liquidation: A member does not liquidate all assets on his account even if he reaches retirement age and begins to withdraw from the SRS account. He can continue to invest until he pulls out all SRS funds.
5. Investment restrictions: The Singapore authority does not impose many investment types and products restrictions for the SRS account holders. However, it is up to operating banks to determine the investments SRS members can hold. Nowadays, members can choose a wide range of investment products, e.g., insurance savings and endowment plans, exchange-traded funds, stocks, bonds, unit trusts, and local or foreign currency deposits.
6. Tax-free investment gains: All the gains from your investments in the SRS account are exempt from taxable income until you withdraw the first sum after retirement. In a word, you may devote more of your income to invest and compound your gain.
7. Maximizing your tax benefits: Once you reach the statutory retirement age, you can minimize the tax benefit by spreading the withdrawals over a 10-year period after the first payment begins. The payment option is the most tax-efficient according to the guidelines from the Ministry of Finance.
Should I Open a Retirement Scheme SRS Account?
You may think SRS is only for wage-earners, who can profit from tax exemption from savings in the SRS account. The scheme encompasses investors from other spectrums and can also benefit them. If you think you have one of the following traits, you should put some savings into the scheme.
- High tax bracket earners: SRS is a tax-reduction savings scheme, where your contributions and investment gains are exempt, and withdrawals are half-taxed. Tax savings subject to the statutory limit are available for further wealth growth.
- Wealth accumulation: If you are a true believer in the time value of money theory: a penny deferred today creates more value the day after through wise and proper investment. You should not ignore the power of deferred consumption. The SRS account is one of the best wealth accumulation tools available. To maximize your wealth, you should use the annual tax-deferred benefits of S$15,800 to increase wealth gains. Warren Buffett, the billionaire, attributes his wealth to the compound effect of money. The gains from tax-deferred money may have an astonishing multiplier effect on your investments.
- Long-term savors: An SRS account can cater to assets like insurance savings plans, ETFs, stocks, and bonds. The nature of the account is appropriate for long-term and goal-oriented investing. Long-term investors may use the mid-to-long run period and tax-break advantage to plan for personal objectives like retirement and other goal settings.
How can I open an SRS Account?
The Ministry of Finance of Singapore has designated 3 banks to run SRS accounts from the Supplementary Retirement Scheme. They are the Development Bank of Singapore (DBS), Overseas Chinese Bank Corporation (OCBC), and Union Overseas Bank (UOB). The following are the details.
DBS offers a diversified range of products to SRS participants to accumulate wealth. They include bonds, Singapore Savings Bonds, government securities, local and foreign currency fixed deposits, stock, single premium insurance plans, and unit trusts. The investment tools meet members’ risk appetites, from low to high.
Besides transferring an SRS account to DBS from other banks, members can link their existing portfolios with the bank to an SRS account like DBS Multiplier Account, DBS Vickers Account, or a digital account.
Requirements for opening an SRS account with DBS:
- You are a Singapore citizen or permanent resident, a foreigner.
- You are of age 18 or above and not undischarged bankrupt.
- You do not have an existing or pending application concerning SRS with another bank(the scheme allows only 1 SRS account for a member).
Like DBS, OCBC offers a 5-year prepayment insurance plan and 2 unit trusts: Schroder Asian Income Fund and Fullerton USD Income Fund. Besides, the bank also provides local and 10 other currency time deposits with tenure of up to 36 months.
Apart from the Singapore Government securities and equities, REITs and ETFs, OCBC offers a monthly share investment plan – the Blue Chip Investment Plan, which provides 20 blue-chip companies and ETFs listed in the Singapore Stock Exchange with a minimum as low as S$100.
The financial institution also offers a structured fixed deposit service. The deposit combines a time deposit with a principal guarantee with the performance of a basket of equities and foreign exchanges. Deposit holders of the product will receive a minimum interest rate of 1.66% with a newly launched tranche.
The opening account procedures are the same as DBS’.
The bank also offers unit trusts, fixed deposits, and insurance plans for SRS members. You can use the eCapitalVoucher to redeem rewards in your SRS account. The opening procedures are the same as the other 2 banks. A member can only have an SRS account at a time.
You Should Know the Following
What more else should I consider before investing in an SRS account?
You may consider the following essential before using the SRS services:
1. You cannot use an SRS account with assets for collateral, guarantee, or security for any transactional activities.
2. The assets in the SRS account are not exempt from creditors.
3. All proceeds or distributions, including dividends and capital gains originating from an SRS account, must revert to their place after the sale.
4. Members cannot nominate a beneficiary to SRS accounts.
5. An SRS operator is responsible for filing tax relief for you, and you can sit still for results.
Are there restrictions on investment product types?
The Ministry of Finance has a liberal interpretation of SRS investments and leaves the discretions to operators. According to the guidelines of ’17, only direct property investments and insurance policies except a single premium plan are not allowed.
Do I have to pay any charges when withdrawing from my SRS account?
Yes, three financial institutions have their fees for SRS account holders. You may consult them before opening an SRS account.
Should I withdraw the remaining funds after a 10-year withdrawal period?
No, but you will have to pay the tax on the 50% of the funds remaining in your account.
Can You Tell Me More About the Withdrawal Period?
The withdrawal period is the length of time for you to withdraw the funds from the SRS account the first time at your statutory retirement age. The period is 10 years, and the Ministry of Finance states it is the most tax-efficient payout period for members to make distributions. However, you can still keep an SRS account after 10 years, but you will first pay the tax on 50% of the remaining balance in the account.
The rule doesn’t apply to life annuities whose payouts outweigh the “10-year period” like life annuity. In that case, you pay the tax on the 50% of payouts from the annuity. Likewise, an SRS operator bank may reject partial payout requests, such as a life insurance policy, because it is difficult to determine the value in a policy at a time.
Can I Make Withdrawals without Liquidating Assets from my SRS Account?
You can withdraw assets without liquidating the position in your SRS account except for the insurance policy or life annuity. However, you must liquidate assets before retiring cash out of your account on the grounds of bankruptcy, before statutory retirement age, and withdrawals exceeding the contribution cap. Besides, the early distributions are subject to a 5% penalty and total income tax.
Find out more on how much to retire in Singapore.
The Supplementary Retirement System is a voluntary contribution scheme to encourage savings for retirement. Besides a dollar-for-dollar tax deduction, you may invest in most types of investments with a few restrictions. After reaching a statutory age, you may withdraw the funds with a half income tax.
Key takeaways include:
- SRS is a voluntary contribution scheme for retirement in addition to CPF.
- Few restrictions on investment types.
- Withdrawals at retirement are subject to income tax on 50% of distributions only.
- Withdrawals are by way of cash or asset transfer without liquidating positions except for unusual situations like pre-retirement.
- DBS, OCBC, and UOB are official SRS operator banks for the SRS scheme.
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