Stretching your dollar with the Supplementary Retirement Scheme

Supplementary Retirement Scheme could also provide some tax savings

Ms P’ing Lim (left) and Ms Chung Shaw Bee highlight some things to know about the Supplementary Retirement Scheme.

If you are looking to reap some tax savings on your assessable income, you still have until the end of next month to squirrel away some cash into the Supplementary Retirement Scheme (SRS).

Not only will this make you eligible for some tax relief, you can also save and stretch your dollar. Banks have got in on the act by offering incentives such as complimentary meals, gift vouchers and cash if you set up an SRS account before Dec 31.

The SRS is a voluntary scheme that complements your Central Provident Fund (CPF) savings for retirement. You can contribute any amount to your SRS account and as many times as you wish within the year, subject to a cap.

The minimum age to open an SRS account is 18. The prevailing cap is $15,300 a year for Singaporeans and permanent residents, and $35,700 for foreigners.

Rather than leaving your SRS funds lying idle in accounts, your contributions can be invested in approved SRS investment options to boost your nest egg.

The SRS is operated by DBS Bank, OCBC Bank and United Overseas Bank, and administered by the Inland Revenue Authority of Singapore (Iras).

Ms Chung Shaw Bee, managing director, head of regional and Singapore wealth management at UOB, notes the interest rate for an SRS account is 0.5 per cent a year, the same as a typical savings account.

"To generate potentially higher returns, investors can invest money they place into their SRS account in a range of SRS-approved products, such as shares, real estate investment trusts (Reits) and exchange-traded funds (ETFs)," she says.

Mr Thomas Tan, OCBC's head of wealth advisory and specialists, adds that the tax savings for individuals can range from $200 to more than $3,000, depending on their chargeable income.

The Sunday Times highlights what you need to know about SRS.

Q How does SRS work?

A Every dollar deposited into your SRS account reduces your taxable income by a dollar. For example, if your annual assessable income is $100,000 and you contribute $10,000 to your SRS account, only $90,000 of your income will be subject to tax that year.

There is a wide range of financial instruments you can invest your SRS funds in to help grow your retirement savings. These include local shares, Reits, ETFs, bonds, fixed deposits, single-premium insurance plans and unit trusts.

Any gains from investments made through SRS funds are non-taxable before withdrawal. Only 50 per cent of SRS withdrawals at retirement age are taxable.

However, you can spread your withdrawals over a period of up to 10 years when you withdraw your SRS at or after the statutory retirement age of 62. The 10-year period begins from the date of your first SRS withdrawal.

So it will be likely that you will pay no or little tax if you have lower or nominal income at retirement.

Hence, you can potentially withdraw up to $40,000 tax-free from your SRS account in a year, or $400,000 over 10 years, assuming you have no other source of income.

This is because only half the $40,000 a year that you withdraw is taxable and the first $20,000 of income is not taxed here. Do note that when you make withdrawals as payouts from life annuities, the 10-year period does not apply, and you may enjoy the 50 per cent tax concession as long as you receive the annuity stream payouts.

SRS withdrawals need not be made in cash. SRS members can withdraw an investment by transferring it out of their SRS account (for example, into their personal Central Depository account in the case of shares).

At the end of the 10-year withdrawal period, if there is still money in your SRS account, 50 per cent of it will be subject to income tax.

As SRS funds are meant to be held until the statutory retirement age, Ms P'ing Lim, head of deposits and secured loans at DBS, notes that some people might prefer to hold on to cash for liquidity. This could explain the lukewarm popularity of the scheme.

Note that for early withdrawals before the statutory retirement age, 100 per cent of the sum withdrawn will be taxed. Additionally, a 5 per cent penalty for premature withdrawals will also be imposed.

Q For whom is SRS more appropriate?

A Ms Kerrie Chang, partner, people advisory services (mobility) at Ernst & Young Solutions, notes that SRS funds cannot be used for buying a house or for medical coverage.

So the SRS will likely appeal to individuals who already have healthy CPF contributions, or have already bought a home and are looking to invest some of their disposable income in a tax-effective way.

"In general, these would likely be higher earners in their 30s onwards, looking to reduce their tax while building their retirement funds, who are inclined to utilise the SRS scheme," says Ms Chang.

"Whether SRS is appropriate for an individual really depends on the 'season of life' the individual is in and their retirement goals."

For instance, a proactive young worker looking to invest some disposable income may choose to invest in the SRS because of the tax benefits.

That said, another young worker may prefer to hold the funds or invest in a more flexible manner in order to increase the pool available for buying a home.

The inflexible SRS features in terms of a long lock-in period as well as the imposition of penalties and taxes on those who withdraw before the holding period would likely deter this person, she adds.

Q Should SRS funds be invested?

A SRS funds contribute to our overall retirement nest egg so it is prudent to manage and review the performance regularly.

The earliest you can make an SRS withdrawal is at the statutory retirement age prevailing at the time of your first SRS contribution. The likely long investment horizon means there is sufficient time to ride out market cycles and volatility. So the earlier you set up an SRS account, the longer your time horizon.

Take a person of 40 years old and contributing $15,300 a year to an SRS account. If he achieves a rate of return of 4 per cent a year, he would have saved $545,000 by age 62.

OCBC's Mr Tan advises customers to first understand the amount of risk they are willing to take.

This is because instruments available using SRS funds vary in terms of their tenor, potential returns and risk levels.

"It is always wise not to place all your eggs in one basket. Some people may have the wrong mindset, that since they cannot touch their SRS funds until age 62, they take aggressive bets and place everything into a single investment. One wrong move can affect your retirement plans," he warns.

Mr Tan adds that customers who are more conservative can consider insurance products like endowments or unit trusts, where overall risk is lower than investing into a single stock.

At the very least, placing funds into a fixed deposit is better than letting them sit idle, earning a mere 0.05 per cent-a-year interest.

Q What is the proportion of SRS money that should be invested and in which investment instruments?

A While cash balances have remained relatively stable at around one-third of the SRS portfolio composition, there has been an increasing allocation to shares, Reits and ETFs, and a declining allocation to insurance products over the years, UOB's Ms Chung notes.

"When deciding the asset class in which to invest, one should consider instruments that generate sustainable income, provide portfolio diversification and have risk controls in place to manage fluctuations in the investment's value," she adds.

For example, you may want to spread your money globally across different geographies and investment types through the unit trusts in UOB Income Builder, which aims to provide regular income through market ups and downs.

Instead of timing the market, you can also consider using your SRS funds to buy stocks or unit trusts monthly through regular saving plans.

Mr Tan says that customers can use SRS funds to buy insurance like single-premium endowment plans, unit trusts or shares through either the Blue Chip Investment Plan or OCBC Securities.

"By contributing to their SRS account, but not investing the funds, capital gains will be minimal, especially if you take into account inflation," he adds.

Q What is the impact of the new personal income tax relief cap?

A Taking effect from year of assessment 2018, there will be an $80,000-per-year cap on the total amount of personal income tax relief an individual can claim. This was introduced to make our personal income tax system more progressive.

This is expected to affect 1 per cent of tax-resident individuals, which means 99 per cent of us can claim reliefs without being affected by the new tax relief cap.

Mr BJ Ooi, head of personal tax and global mobility services at KPMG in Singapore, notes that capping total personal reliefs would not affect the vast majority of taxpayers.

"However, for a particular group of resident taxpayers qualifying for Working Mother Child Relief, they will need to consider if their total reliefs would exceed $80,000 for a given year before making any SRS contributions, since any such contribution is not refundable," he says.

EY's Ms Chang suggests that individuals utilise the Iras calculator to figure out their total reliefs before SRS contributions are made.

She worked out that a working mother earning between $111,445 and $151,860 who contributes to the SRS would be able to maximise the $80,000 personal reliefs by adjusting the contributions accordingly.

"This requires some level of effort and knowledge on their part to be able to take advantage of the tax reliefs available under the SRS," she says.

Hence, a working mother of two Singapore citizen children, earning more than $111,450 a year and contributing the maximum amount to SRS, will potentially be paying more tax than previous years due to the relief cap.

"Given this, it is more likely that working mothers with such profile may look for alternatives, perhaps more flexible or higher-return investment opportunities, as the tax relief is no longer available to them," she says.

Q What are the SRS-related incentives offered by banks until the end of this year?

A DBS/POSB customers can get up to $50 cash if they top up their SRS.

OCBC says the first 2,000 customers to open a new OCBC SRS Account and deposit $15,000 within seven days of the account opening will get $50 worth of gift vouchers.

UOB customers who invest the required minimum amount in an SRS-approved unit trust or insurance plan will have up to $280 credited into their SRS account or they can choose a complimentary buffet dinner for up to a party of four at Singapore Marriott Tang Plaza Hotel.

UOB will credit $30 into their SRS account or they can opt for a complimentary high-tea buffet for two at Marriott Tang Plaza Hotel.

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A version of this article appeared in the print edition of The Sunday Times on November 05, 2017, with the headline Stretching your dollar with the Supplementary Retirement Scheme. Subscribe