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.