Enjoy tax break while saving for retirement

This story was first published in The Straits Times on Nov 17, 2013

Invest, don't leave cash idling in account

The acronym "SRS" will hardly strike a chord with most Singaporeans despite the country being awash with abbreviations, but it is a key one to get your head around.

Those in tune will know that it stands for the Supplementary Retirement Scheme (SRS), a little-known programme set up in 2001 to complement the Central Provident Fund (CPF) by encouraging people to save for their silver years.

"It's a voluntary tax deferral scheme which allows a tax-paying individual to enjoy income tax savings if he contributes to the scheme," says Manulife Singapore senior manager Anne Tay.

Sunday Times Invest finds out how it works while financial experts explain how to gauge whether it is suitable for you.

1. How it works

The SRS allows a Singaporean or permanent resident aged over 18 to put up to $12,750 a year into a special account that can be opened at DBS Bank, OCBC Bank or United Overseas Bank.

Foreigners can put in a maximum of $29,750 yearly.

"Every dollar you put into SRS allows you to enjoy the same dollar in tax relief, so it helps to lower your tax bill," notes Providend's head of financial planning, Mr Eddy Cheong.

For instance, if your taxable income is $100,000 and you put $10,000 into your SRS account, you pay tax on $90,000, not $100,000.

Contributions need to be done by Dec 31 in order to claim tax relief for income earned in that particular year.

The money can be used to invest in a selected range of financial instruments, including stocks, unit trusts, fixed deposits, structured deposits and insurance. SRS funds cannot be used for property investments.

A key benefit is that you can withdraw up to $40,000 tax-free from your SRS account a year over 10 years once you hit the statutory retirement age - now 62.

The catch is that early withdrawal before the retirement age means you have to pay tax on the full amount taken out plus a 5 per cent penalty.

The 5 per cent penalty is waived under special circumstances such as death, medical grounds and bankruptcy.

2. Rising popularity

The number of SRS account holders has nearly doubled in the last five years, from 41,334 in December 2007 to 82,512 last December, according to Ministry of Finance (MOF) data.

In that period, total SRS contributions nearly trebled, from $1.44 billion to $3.64 billion.

Local banks are witnessing the increasing popularity of such accounts. Close to half of the SRS accounts are with DBS.

OCBC's SRS account holders have increased in number by an average 19 per cent year on year for the past five years, while SRS accounts at UOB have risen by 13 per cent a year over the same period.

"We are seeing more professionals, managers, executives and technicians opening SRS accounts," says OCBC's head of deposits, Mr Ling Seng Chuan.

Mr Goh Teik Cheng, head of research and product advisory at UOB, says: "The largest number of SRS accounts are opened in the month of December each year."

3. Pros and cons

Aside from tax savings, the key edge of SRS is the ability to create financial discipline to consciously squirrel aside money for retirement each year.

UOB's Mr Goh calculates that if you open an SRS account at age 27 and make yearly contributions of $10,000 until 62, you will save a total of $350,000.

If this is invested conservatively with an average 2 per cent return a year, you would have just over $500,000 after hitting retirement, he adds.

There is also the double advantage of first getting tax relief and then being able to invest the contributed SRS funds.

"It's like killing two birds with one stone; you are able to enjoy tax relief and then invest," says Manulife's Ms Tay.

But there are also disadvantages.

There is a chance that if SRS savings are entirely withdrawn upon retirement, you will end up paying more income tax on the withdrawals than what was gained in tax savings, Mr Vasu Menon, OCBC's vice-president of wealth management for Singapore, warns.

But this may be mitigated by staggering withdrawals over a pe-riod of 10 years, he adds.

There is also the possibility of losing money from investing the funds, say experts, especially if you are not financially savvy.

This is in contrast to the guaranteed interest return you would reap with funds in your CPF Special Account, which is intended for old age.

4. Who should do it?

Certain groups of people stand to benefit more from SRS than others, the financial planners point out.

Providend's Mr Cheong identifies high-income earners, those who are older, those with cash that can be set aside till retirement and those with low or no taxable income during their retirement years as groups who will likely gain more from SRS.

The scheme seems to be most popular among those aged between 36 and 55, who are probably at the peak of their earning power.

MOF data shows that as of last December, 32 per cent of all SRS account holders were aged between 36 and 45, while 35 per cent of them were between 46 and 55 years old.

5. Don't leave it in cash

Since the scheme is targeted at retirement, wealth experts suggest investing with a long-term perspective.

"As you are likely to hold your SRS money for a long time, you may like to explore investment that could benefit more with time," says Providend's Mr Cheong.

As of last December, about 35 per cent of all SRS funds is left as cash, with 25 per cent put into insurance and 21 per cent invested in equities.

Leaving SRS funds untouched will mean inflation eating away at your savings when you withdraw the cash for use after retirement, says Ms Tok Geok Peng, DBS Bank's senior vice-president for consumer deposits. She notes that at DBS, about 30 per cent of the funds in the SRS accounts ie in the form of cash.

She suggests: "In order to make your funds work harder for you, consider investing the SRS money in a variety of approved investment instruments."

At DBS, account opening will be made more convenient from Nov 22 to Dec 18, when SRS accounts can be opened online and contributions can be made online or via SMS.

What I'm doing with my SRS funds

This story was first published in The Straits Times on Nov 17, 2013

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