Pay less tax and build up nest egg with SRS

PHOTO: ISTOCKPHOTO

This is the second of a three-part series on financial planning. Last week, we discussed how to divvy up your first pay cheque. This week, we highlight retirement planning for those in their 40s.

Most people never really scrutinise the size of their retirement nest egg until they reach their 40s, which is 10 years too late, financial advisers say.

The trouble is, when people are in the prime of their life, they have much more exciting things to spend their money on than their future selves. 

But the risk of illness and the other challenges of getting older mean it is prudent – vital, in fact – to diversify into new income streams beyond one’s regular take-home pay. 

The Sunday Times offers some tips on financial planning at this crucial mid-career juncture.

Investing in stocks and shares

Investing in stocks and funds is one way to be fully prepared, and the Government is dangling a tax carrot in this regard. 

This incentive is the Supplementary Retirement Scheme (SRS). 

Investors can open an SRS account at any of the three local banks, and every dollar invested in that account is deducted from your taxable income, up to $12,750 a year. 

Next year, the contribution cap will go up significantly to $15,300. 

The key caveat is that cash in the account cannot be withdrawn before the age of 62 without incurring a penalty. 

Advisers say the SRS is a good match for mid-career folk who are investing for retirement, with a lower risk appetite and a long-time horizon of 20 years or so. 

DBS Bank Singapore’s senior vice-president at its consumer banking group, Ms Sharon Tan, says the higher contribution cap will give higher tax savings. 

She also encourages individuals to start a regular savings plan which will take away the issue of timing and emotions. 

The approach involves buying a fixed amount of investments every month, no matter how good or bad markets look. It takes the stress out of investing, as investors do not have to decide if the fund is expensive or not, and if market conditions are right for investment

Central Provident Fund

  • Don’t just rely on CPF money

  • Maintain your monthly contributions to the Central Provident Fund. But be mindful that this is not a complete retirement plan and may not give you the retirement income you want.

Maintain your monthly contributions to the Central Provident Fund. But be mindful that this is not a complete retirement plan and may not give you the retirement income you want.

CPF members should also not overlook the Retirement Sum Topping Up Scheme. 

If you contribute to the CPF of your loved ones, you can enjoy an additional tax relief of up to $7,000 per calendar year if you use cash.

For you to qualify for tax relief for cash top-ups for spouse/siblings, your spouse/
sibling (i) must not have income exceeding $4,000 in the year preceding the year of top-up (e.g. salary or tax- exempt income such as bank interest, dividends and pension) or (ii) is handicapped. 

“Loved ones” refers to parents, parents-in-law, grandparents, grandparents-in-law, spouse and siblings. 

To make a top-up, the net balances in your Ordinary and Special Accounts, including amount withdrawn for investments, must be more than the current Full Retirement Sum. Only Ordinary Account balances can be used for the top-up. 

Property is a long-term investment

Investing in a second property is a popular pursuit. Property is also the most expensive purchase most people will make, and therefore a huge part of retirement planning. 

Manpower Minister Tan Chuan-Jin has said that most Singaporeans who work regularly should have no worries meeting their retirement needs, provided they “make prudent housing choices”. 

Keep in mind that property is a very long-term investment – a home loan will eat into your monthly income for years. 

A good investor should start by making an assessment of where the property market is headed, with an eye on rental rates and vacancy rates, as well as policy risks such as property cooling measures. 

But with many investors opting to stretch their loan tenures to the age of 65, Mr Alfred Chia, chief executive of financial advisory firm SingCapital, suggests an even stricter test – assume a property market crash. 

“If there is no rental (income), can you cover your monthly instalments?” 

If the answer is no, then refrain. No one can say when the next crash will be or how long it will last, though it will certainly take holding power to survive it. 

Buyers should also note that CPF savings can be used to finance the purchase of a second property, including private property, so long as it is freehold or has at least 30 years left on the lease. 

Know what you want out of your insurance policy

Injury expenses, hospitalisation and other medical costs can weigh heavily on those who are insufficiently insured. 

But insurance products also have a strong forced savings element, so buyers should sign on only if they are sure they are going to pay the required premiums all the way to the end of the policy. 

As Wen Consulting principal consultant Ong Lean Wan puts it: “If you want to buy insurance, you better know for what need.”

For many insurance policies, the penalty is biggest if you end the plan in the first three years, says Mr Chia. 

“You won’t get back even half of what you saved.” 

Another trap to watch out for is investment-linked insurance plans – where your premiums will be used to pay for units in investment linked sub-funds of your choice. Often, the charges for this service tend to be too high, advisers say. 

A good place to shop for insurance products is compareFIRST.sg, a newly launched online aggregator that is part of a Government-led push for greater consumer transparency. 

For those who know what they want to buy, Mr Ong recommends going for direct-purchase insurance (DPI).
Premiums of DPIs are lower than for comparable products because DPIs are sold without financial advice from insurers’ customer service centres or websites, so no commissions are charged. 

However, the product range of DPIs is limited to term and whole life insurance only. 

Factor in some mid-life exploration

Mid-life often brings with it the strong temptation to declare: “And now for something completely different!”  

Plenty of cash can be thrown at an impulse buy, a new business venture or a complete lifestyle makeover – with greatly varying results. 

But even the riskiest endeavours can be managed in a prudent manner so that your savings do not go down the drain. 

Mr Chia advises would-be entrepreneurs and hobby businessmen to set aside enough emergency funds to tide them through six months of expenses, given that a lot of new businesses ultimately fail. 

Entrepreneurs should also have a clear exit strategy, and be prepared to write off losses of as much as $100,000, says Mr Roy Varghese, senior adviser at iFAST Financial. 

But self-employment is not a trend to be lightly dismissed. 

The success of Uber, a location- based app that matches drivers to customers seeking a ride, has sparked much excitement about the “Uber-isation” of work – a shift towards an on-demand economy where people work according to a flexible schedule on their own terms. 

These workers lack the security of a regular job but this fast-growing option could well jive with the needs of an ageing population, especially if older workers are forced out of their jobs sooner than they had counted on. 

“Life doesn’t end at the official retirement age,” says Mr Varghese, noting that retirees are becoming more open-minded about staying “economically active”. 

marilee@sph.com.sg

Read Part 1 of the three-part series here: Got your first pay cheque? Start saving

Read Part 3 of the three-part series here: Cut down risk as retirement nears

A version of this article appeared in the print edition of The Sunday Times on June 21, 2015, with the headline 'Pay less tax and build up nest egg with SRS'. Print Edition | Subscribe