At first glance, the Supplementary Retirement Scheme (SRS) appears to be a very good deal. But after a simple analysis, we will know why it is not the case.
As illustrated in today’s Sunday Times (see similar example in Finatiq), a contribution of $11,475 to your SRS account brings about a tax saving of $1,096. This is a yield of 9.6%. To the uninitiated, the yield looks impressive, and it may seem worthwhile to have the $11,475 locked up in SRS.
However, take note that the “yield” is one-time. And that you will not be able to withdraw from your SRS account until you hit retirement, which is about 30 years away for most people. (Premature withdrawals are allowed, but there’s a penalty of 5%.)
We calculated: if you instead invest the $11,475 and achieve a mere 0.31% return per year, you will make slightly more than what you would have got from the SRS tax saving. (Yes, no typos – it’s zero point three one percent).
So, unless you are extremely bad in investing, or you’re a compulsive spendthrift who needs to force himself to set aside some savings, or you simply have too much money, you can go with the SRS.
Ok, some of you may ask: can’t we use the SRS money to buy things that we are buying anway? Things like insurance come to mind.
But it seems the SRS is not designed to encourage this, as according to the MOF SRS Faq: (1) only single premium insurance products are allowed, (2) total life and TPD cover is capped at 3 times the single premium (how useful it that?), and (3) critical illness, health and long-term care are excluded (my goodness!).
Furthermore, direct property investments are also not allowed, rendering the SRS completely useless for people who aren’t interested in buying investment products from the SRS-linked financial institutions.
So again, if you already plan on buying things like unit trusts from the “pretty girl” or “pretty boy” in your bank (see wrong and right way to invest), you can consider putting money in SRS, enjoy some tax saving, and make that pretty girl happy for closing a sale (and getting a commission from it).
Otherwise, forget SRS.
43 Comments
You can invest in stocks directly using SRS funds, not just unit funds.
I think the only real drawback is the tax if one withdraw prematurely.
If one is 99% confidence that the fund will not be touched till retirement, its really a good scheme.
I might consider using the money to invest in index fund via SRS.
note that whatever capital gains you got from investing your SRS funds will be taxed at withdrawal, whether the gains are from stocks or unit funds.
my personal view is that if you are very sure you’ll retire with no income, then SRS may be good.
but if you foresee you will continue to work and possibly earn a higher income than now, then it’s harder to weigh the options.
given the possibility of tweaks to the SRS scheme (may or may not be good) and increases in income tax rates (your withdrawal from SRS will be taxed at 50% of the prevailing rate at time of withdrawal), i personally think it’s better to forego the tax savings.
i always think that a bird in hand is worth two in the bush. too hard to see 20-30 years from now.
There is one other use for the SRS actually. If you are in one of the higher tax bracket, say 17% or 20%, it makes sense to put money into the SRS. At 20%, the $11,475 limit is worth $2,295 of tax reductions.
If you happen to get retrenched or if you decide to take a year off work and go be a student, you can withdraw the full $11,475 in that year. Assuming you have no income (other than interest and dividends) in that year, the $11,475 you withdraw will not attract any income tax (because the first 20k of your income is tax-free) and you only pay the 5% penalty, and still save 15%/12% worth of tax!
good point, student.
i read through the SRS FAQs and discovered that it benefits foreigners more than residents. first, foreigners can put in more per year, double that of residents. second, and more importantly, they can withdraw the Full Amount Penalty-Free after just 10 years!
I don’t understand why the govt keeps asking Singaporeans to part with their money. But Singaporeans ain’t stupid, judging from the poor take up rate of the SRS scheme. We already have enough of our money that we can’t touch! It’s called CPF.
Its easy to understand.
Most people do not save for retirement based on their statistics received. The reason you visit this site regularly is because you belongs to the minority who save diligently and are financial conscious.
i agree with the above comment that it’s better to keep the money to yourself.
i can’t see the difference between SRS and voluntary CPF contributions. both give you tax reliefs and both allow you to invest in stocks. while there is the CPF minimum sum beast to deal with, it won’t be a problem if you are in the higher income bracket, which the SRS is obviously targeting.
i also agree with the comment that SRS benefits foreigners more. example: a foreigner working here can put into SRS more than 200k over 10 years, quit his job and leave singapore, and a year later withdraw the entire 200k but taxed at 100k (cos he has no other income in singapore then).
singaporeans can’t do that.
“there are actually some additional costs that banks and brokerages impose on SRS accounts, like custody fee”
the above alone already put me off.
the 0.3% explanation is still valid – suppose that I self-invest the money instead of investing via SRS (which incur custodial fees and even management fees if you invest with funds), as long as I make a net of 0.3%, I will gain back the “loss” in the tax savings. and i have full liquidity and full control.
i have a strong feeling that the custodial fee alone is already more than 0.3%.
Further, they always say things like this: “DBS Bank reserves the right to revise the above rates from time to time”.
And they have lots of opportunity to increase the charges until you retire or give up. 🙂
i prefer to manage my own retirement funds rather than go through hoops only to let others manage for me for a fee.
worse, sometimes they make me lose money and still charge me for it!
whether it’s ETFs or stocks, i’ll do it myself and save the heartache.
Is the money put in SRS income-tax deductible? Wouldn’t that save some money?
Kevin:
Yes it is, but the main discussion here is whether there is a net benefit for doing so, given that banks may charge a recurring fee for managing your SRS account, the unforeseeable tax structure when you retire, and of course the illiquidity of your SRS funds.
This is not forgetting that you already have CPF monies that are pretty illiquid and the government has a tendency to push back the official retirement age and do lots of policy tweakings that may or may not be beneficial net net.
Some people here think it’s better to keep the money to themselves. I’m one of them. I would rather manage and invest the money myself, and I have full control.
i, for one, is happy with SRS
it is cheaper to invest with SRS than CPFIS
and i have full control
my only grouse is DBS only provides monthly statement (too long)
To initating author
You are looking at a per annum tax savings, not 1-off over the next 30 years
to author:
I’ve actually been contributing to SRS for a few years now, but seriously reconsidering as I run the real risk of exceeding the $440k limit by the time I reach 62.
A couple of points you might want to consider as well:
Look at the issue of how much tax one is saving – at the 14% bracket, the saving is $1606, which translates into no more than 1.76% of your _taxable_ income (as your taxable income will be at least $91,475). At the 8.5% and 20% brackets, the savings are no more than 1.89% and 0.69% respectively.
So by annually putting aside $11475 + an additional 2% of one’s taxable income (but this 2% must be realised thru cutting on expenses, not other savings)into a long-term invest plan, one can replicate the “benefit” of SRS.
Secondly, trying to invest SRS funds into stocks means one is restricted to either locally offered unit trusts, ETFs or whatever’s listed locally. For an investor wanting to create a globally diversified SRS portfolio will have to contend with unit trusts and ETFs which have high sales/brokerage charges and annual fees in comparison with whats available say in US/UK markets. So expect the CAGR of your SRS porfolio to lag 50-100bps behind a similarly diversified non-SRS porfolio.
is there a $440k limit for SRS?
You got quoted in today’s Sunday Times in an article by Goh Eng Yeow, who said “while not disputing the merits of the points (you and others) raised”, he can only use his own experience as an SRS account holder to point out some of the benefits.
SRS is for the high earners lah. So simple to see.
May I ask how we can reduce personal tax if the SRS is not a good approach? I’m single and earn between 96K and 111K depending on bonus for the year. No children but have parent relief. I’m part of the sandwich class, can’t qualify for HDB but can’t afford condominum either, and appreciate any advice on what I can do to reduce personal tax. It’s very painful when more than half the bonus you work so hard for goes into income tax. Looking forward to a reply.
thanks for the reply serendib.
yes, read that iras webpage before.
to clarify, does topping up family members cpf qualify for tax rebate? but what if they have emptied out their cpf?
Does anyone know if the government is considering any changes and updates to SRS?
I think the principle and intention of SRS is great, but more should be done to really make it simpler and straightforward. Some points of my wishlist include:
1) scrapping the tax on 50% of withdrawals and make it completely tax free for 100% of withdrawals at retirement age.
2) widening the umbrella of investment/insurance products allowed
3) make it the same for Singaporeans/PRs/Foreigners (complete equality and fairness)
I’d like to see the MOF review the SRS scheme and rejuvenate some life into it. There needs to be more discussion on how we can encourage better retirement planning in singapore.
Also – can someone clarify, do Spore PR’s benefit exactly the same as Singaporeans? I remember reading something about 20% tax for Singapore PRs (or is that only for non resident tax payers? regardless of PR and Sporean?)
People who agree with the author, like fees, completely miss the point. Let’s say A and B bought the exact SAME lousy shares that only earn them 0.3% a return. A uses SRS and upon retirement he enjoys the tax savings and the returns. B does not use SRS and upon retirement all his earnings are lost to the taxes he paid.
Disadvantage/disincentive: One thing that negates the benefits of SRS is when you start making withdrawals your children cannot claim parent reliefs anymore. THE MOF should ease this restriction.
Useful analysis , I learned a lot from the analysis ! Does anyone know where my company might locate a fillable IRS 8917 version to fill in ?
Hi
Assuming the balance in the SRS account is $500,000 on our retirement age.
We choose to withdraw $40,000 per year for 9 years. And in the last year, we buy an annuity using the balance which pays out less than $40,000 per year.
We would continue to enjoy zero tax expense assuming we do not have other taxable income. Possible?
Thanks.