Readers of heartlandboy.com would have been aware that both Heartland Boy and Heartland Girl had opened SRS Accounts in 2015 as part of their retirement plans. Heartland Boy and Heartland Girl’s SRS Accounts are with DBS and OCBC respectively. While SRS is a great way to reduce income tax, Heartland Boy also views it as a complementary pillar to his retirement funds. The SRS Account in Singapore offers plenty of investment products that provide the option to invest using the SRS Account. The approved investment products range from complicated annuities and insurance policies to simple options such as fixed deposits and ETFs. For a hassle-free way to manage his investments under the SRS Account, Heartland Boy has chosen to invest his SRS in ETF in order to grow his retirement funds.
Why Invest Your SRS Funds?
Your money in SRS Account earns an interest rate of 0.05% per annum. Therefore, if you contribute to the maximum annual limit of S$15,300, it earns a grand total of $7.65. That is probably sufficient for you to buy one Extra Value Meal at MacDonalds in a single year. Of course, an interest rate of 0.05% pales significantly to OCBC’s 360 Account and UOB One Account. In other words, your funds in SRS is left idling around earning a negligible return. Readers would know that Heartland Boy wants his cash to work as hard as him, and therefore advocates every SRS account holder to explore SRS investment products.
Why Invest SRS in ETF?
Having explained the low interest rate levied on your SRS Accounts and hence the low opportunity cost in investing your SRS funds, Heartland Boy’s strategy is to invest his SRS in ETF. (Exchange Traded Funds) Basically, an ETF is listed on the stock exchange just like any other stock and it aims to replicate the performance of a specific stock or commodity index. MoneySense does a very detailed explanation of ETF here. Given that there are plenty of instruments to choose from, you may wonder why Heartland Boy particularly chose to invest his SRS in ETF? To be specific, Heartland Boy has used his SRS funds to purchase STI (Straits Times Index) ETF at $2.53, $2.79 and $2.87 since the beginning of 2016. So here are 5 great reasons why STI ETF is the perfect instrument for your SRS funds.
1. STI ETF’s Superior Historical Performance
STI ETF has generated 8.4% annualized returns over past 10 years (2003-2013). Applying the Rule of 72, it means that your investment will double in value in 8.5 years. Therefore, if you had invested STI ETF in 2003 with your SRS Account and did nothing, your money would have already doubled by 2011! Moreover, the 5% penalty charge levied for premature SRS withdrawal encourages the SRS Account holder to adopt a long-term view. The STI ETF, with its 8.4% annual return, seems like one of the best stocks to have in your SRS investment portfolio. Therefore, the nature of the SRS setup forces you to adopt a very long horizon and the STI ETF is a wonderful stock to buy and hold for the long term given its superior historical performance.
2. STI ETF Picks The Best Blue-Chip Stocks For You
Many of you may be concerned that investing in stocks with your SRS funds is too risky, especially since you are depending on it to become a supplementary pillar of your retirement funds. Heartland Boy wholeheartedly agrees, and in fact he is even more risk averse than the average retail investor. It is why he chooses to invest his SRS funds in STI ETF. The STI ETF picks the bwest performing 30 blue chip stocks in Singapore. Moreover, it adopts a Darwinian approach where the weakest performing stocks are weeded out of the STI on an annual basis. It is like the English Premier League, where the weakest 3 teams are relegated annually. So, you can simply buy, do nothing, and be guaranteed that you will be holding the shares of the 30 best companies in Singapore at any one time.
3. STI ETF Has No Rights Issue
It is only prudent that you invest your SRS in stocks that have no history of calling for rights issue. A rights issue is where a company issues extra shares at a discount to entice shareholders to place more money with the company. Since SRS has an annual $15,300 contribution limit, you may find that you are unable to participate in a rights issue if you have already reached the maximum limit. For this reason, the STI ETF, due to its investment structure, will not be calling for a rights issue, and you need not fear that you will lose out from not participating in a rights issue.
4. Dollar Cost Average With STI ETF
While Heartland Boy did not strictly adopt a dollar-cost averaging approach when investing SRS in STI ETF, he did buy whenever the STI ETF dips 10% more than his original purchase price. Today, he is very glad that he is still in the money with this augmented approach. Readers will be pleased to learn that there is a simpler and more disciplined way to invest SRS in ETF. For instance, those with an SRS Account opened with OCBC Bank can participate in a regular savings scheme operated by the bank to buy the Nikko AM Singapore STI ETF.
OCBC Blue Chip Investment Plan
Known as the Blue Chip Investment Plan, the investment quantum starts from only $100 per month.
5. You Can Withdraw Your SRS In The Form Of Investments
When the statutory age for withdrawal is reached, those who have invested their SRS in STI ETF need not worry that they must liquidate their investments. Withdrawal is no longer confined only to cash withdrawal. Since July 2015, SRS Account holders are able to apply to their SRS bank operators to withdraw investments from their SRS Account into their Central Depository (‘CDP’) accounts. This method of transfer will also qualify for the 50% tax concession if the conditions are met.
Compelling To Invest SRS in ETF
The above are 5 great reasons why you should invest your SRS funds in STI ETF. It is one of the simplest and best investments for your SRS Account. [Note: If you are curious on how Heartland Boy’s portfolio has done thus far, you can refer to this stock investment review.] Moreover, compared to CPF’s Ordinary Account (2.5%) and Special Account (4%), SRS’s 0.05% interest rate means that the opportunity cost of using the funds to invest is lower. Oh you may consider that to be reason number 6 as well.
For those who are interested to attend a free seminar or free webinar by SGX in December 2018, click on those links to register!
which platform you used to purchase the STI?
Hi kk,
I used DBS Vickers. Alternatively, the answer to your question can be found here: https://heartlandboy.com/standard-chartered-brokerage/
Hi, do you use SRS to purchase ETF? which platform you use?
Yes i do. I use DBS Vickers
what’s the brokerage fee for STI ETF using DBS vickers?
Hi KK, you may refer to their website. (https://www.dbs.com.sg/vickers/en/pricing/default.page)
Hi – so difficult to get an answer from DBS (where my SRS account is) about the mechanics of investing SRS. they honestly do not want to tell me. I have a DBS Vickers online account, too. they said you cannot electronically link those two accounts.
so my question is, how do you use DBS Vickers? Do you use cash only option, and transfer from SRS account? I do not want to incur 5% penalty charge.
Hi Wannamaximize,
I cannot believe that DBS said you cannot link these 2 accounts? I linked mine online.
Once it is linked, you can start to buy SRS-approved ETF, stocks on DBS Vickers. You just have to toggle between the SRS account and Cash account when confirming the trade.
Good luck!
Rgds,
Heartland Boy
Hi, is the STI ETF you’re referring to the same as Nikko AM Singapore STI ETF which you briefly mentioned? Or are there several STI ETFs?
Hi Lionel,
There are 2 STI ETFs that I am aware of. Nikko and SPDR.
Rgds,
Alison
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. is there any catch?
Thanks.
In my opinion, that is right, assuming 1) the income tax bracket and rate then is about the same as the current one, and 2) you have no other taxable income in the first 9 years after the retirement age.
Alternatively, you could use the entire $500,000 to buy an annuity, then the payout would be distributed over the life time more evenly. hence reduce the chances of being taxed. But every year’s payout will be taxable income. And I think the annuity can not be surrendered after the SRS account was deemed closed (10 years after the first withdrawal from SRS account).
Catch: we don’t know what will be the income tax when we retire.
Hi Robert,
You posed a very intriguing question and I directed your query to IRAS. Here is their reply reproduced in full.
“The amount (except for life annuities) in the SRS account will be deemed to be withdrawn immediately after the end of the 10-year withdrawal period. If the SRS member has insurance policies such as endowment and termed annuities in his SRS account on expiry of the 10-year withdrawal period, he does not need to close his SRS account or surrender his insurance policies. The value of the insurance policies (i.e. surrender values as determined by the insurance companies) together with cash and market value of other investments in the SRS account will be deemed withdrawn.
The SRS operator will report 50% of such balance to IRAS and this is subject to tax in the following year.
For investments in life annuities, the 10-year withdrawal period does not apply. So long as you continue to receive your annuity streams in perpetuity, 50% of the annual stream will be subject to tax.
If you choose not to withdraw the balance and leave the balance with the SRS operator, returns from such investments will be subject to the same tax treatment as any other investments in the future.
You can refer to our website for more information on tax on SRS withdrawals: https://www.iras.gov.sg/irashome/Individuals/Locals/Working-Out-Your-Taxes/Special-tax-schemes/Supplementary-Retirement-Scheme–SRS-/Tax-on-SRS-withdrawal/”
I think you are referring to purchase of life annuities where the 10-year withdrawal period does not apply. 50% of the annual stream will be subject to tax. So from say age 71 (62 being the first year you withdrew) till the day you pass away, you should not be subject to income tax if 50% of the annual stream (being your only income) does not exceed the minimum income tax bracket.
Hi, would you recommend buying NIKKO STI ETF via POSB Saver-invest or via DBS Vicker?
I have recently subscribed to POSB regular saving plans but wonder if DBS Vicker will be a better choice.
Thank you!
Hi Claire,
I invest in STI ETF via DBS Vickers as DBS Bank is only 1 of the 3 approved banks for SRS accounts. Therefore, it became convenient to link it to my DBS Vickers. Usual trading fees applies per transaction: minimum $25 or 0.28% of the value.
On the other hand, a 1% sales charge is levied for POSB Invest-Saver. So that works out to $10 for every $1000 purchase. So long you do not spend more than $2,500 per month, the POSB Invest-Saver is a cheaper way to purchase STI ETF. It is also a very disciplined and automated way to dollar cost average your investment.
Hi Alison, does it mean that every month you incur $25 as transaction fee?
Hi Anna,
I perform a modified “dollar cost average”. When the STI dips 10%, I will buy in using SRS funds. So the transaction fee may not be on a per month basis. Rather, it is dependent on how frequent I buy, which is then dependent on whenever STI dips 10%.
Hi heartland boy,
Out of topic but I love the layout of your blog.
Which platform are you using? And what theme?
Thanks!
Shafik
Hi Shafik!
Thanks for the compliment! We are on WordPress and using a paid theme called Divine by Restored 316.
Love,
Sophia
P.S. Shameless self plug for Heartland Girl: https://sofia.com.sg
At this STi do you recommend to buy STI ETF?
Hi Mike,
At current P/E level, STI ETF is trading very close to its historical mean. So it is neither undervalued nor overvalued. For myself, I am staying on the sidelines at the moment.
Hi
Whats the benefit of buying a regular savings plan versus manually investing via a brokerage account on our own considering that the RSP charges mgmt fees too?
Hi Zan,
I think the advantages are automation (convenience) and discipline!
Thanks I enjoyed this piece. Does the poor historical performance of the STI the last couple of years change your view on this?
Personally I’m wary of investing too heavily into the STI due to the lack of diversification and the implicit bet on the Singapore economy. My investments are most in REITs, foreign indexes, and a few local counters that I really like.
Hi Financial Horse,
The poor performance of STI in the last couple of years did not change my mind about this strategy. I am using SRS as a tool to lower my taxes first and foremost. My next aim is to preserve the capital inside the SRS. Instead of allowing the money to gain negligible interests, I choose to invest in STI over the long run. I also choose a modified form of DCA where I buy whenever STI drops 10% from my purchase price. The STI is fairly valued in my opinion right now so I allocated some SRS funds towards GE205 where i get 2.05% p.a. for 3 years. So if you look at it, I am quite flexible with my SRS funds. Cheers!
Hi heartlandboy, I am thinking of opening SRS and have a few questions.
Let’s say I contributed 100K over the years and used the funds to buy ETF along the way.
Portfolio becomes 120K.
Q1/Scenario 1 : If I withdraw the funds before 62, 5% penalty and 100% tax will be considered on contributed amount 100K?
Q2/Scenario 2: I hit 62 and withdraw the funds yearly (assumption amount withdraw is greater than minimum taxable amount), 50% tax will be considered on contributed amount 100K?
Q3: Do you suggest to invest the yearly contributed amount? or always leave some as cash in SRS.
Thanks in advance.
PC
Hi PC,
Here are my replies. Please know that the following are based on my knowledge and i recommend that you consult IRAS.
Q1- Not 100K. it will be on the entire 120K withdrawn.
Q2- on withdrawn amount
Q3- No right or wrong approach. Last year, I felt the market was no longer cheap and left more cash in my SRS. As such, i was able to participate in the GE205.
Hi heartlandboy, regarding to withdrawal of investment to CDP account, is it applicable to RSP saving plan too?
example: OCBC Blue chip plan can use SRS. In that case, can we make withdrawal to our CDP account?
Hi PC,
Do you specifically mean buy shares that are deposited into our own CDP account using SRS funds?
Hi Heartlandboy,
Interesting article, if you have 15300 in your SRS account, would you recommend buying the Nikko STI ETF in RSP at a smaller amount say 500 or maximize to 1700 to save on the sale charges? Since any investment above $1,000 and less than $1,700 will be cheapest with OCBC as compared to Poems/Maybank/POSB
Regards
Hi CJ,
I would maximise to save on the sales charge.
Is it a good time to buy sti etf now? I don’t know if it is undervalued or overvalued. Tx.
It depends on whether you are practising a DCA strategy?
For me, I bought last month using CPF OA monies when it dipped below 3000 points.
Now my thoughts is to put $15,300 into srs. Then the next question is if I should invest most of it into insurer retirement plan OR wait and hold to buy sti etf at a reasonable price?
hi soichai,
great time to put in those monies. the 3 banks are offering various year-end promotions to attract your monies. I guess either option is superior to doing nothing. the interest rate in SRS is puny.
HI, can i contribute both $7k & $15.3k into SA & SRS respectively and still enjoy tax rebate for both (with these, i have not exceed $80k limit) ? Also, which bank SRS acct is better ? Thanks.
Hi John,
Yes, you can definitely do both.
I think all SRS bank accounts are the same. You can choose one which offers the best year-end promotions!
Hi HLB, thank you for writing and sharing this article. I hope baby Olympia has fully recovered (it looks like she did looking at the shots taken during bb shower!).
What is your take in using SRS to invest in StashAway vs on STI ETF?
Hi E2W,
Thanks for your well-wishes! Yes, she is a healthy and happy and v ATTENTION seeking baby now lol.
I would prefer to use my SRS to invest in STI ETF because of the unique DCA strategy that i employ (automatically buy when it dips 20%). I would also avoid paying more substantial management fees.
Having said all these, I strongly advocate investing your SRS funds rather than leaving them idle! News just came out that SRS funds can be used for SSB. That’s amazing news!
Hi! I just opened my SRS account with OCBC (apparently should have done so earlier) but am undecided what to do with the funds. The bank person recommended a insurance/endowment plan with Great Eastern but I’m now also considering buying the STI as you have done. Do you have any other recommendations re SRS funds and do you think the STI is currently under or over-valued? Thanks for your advice in advance!
Hi Bee,
I would recommend that you consider the Singapore Savings Bond in 2019 as MAS authorises the use of SRS funds to purchase that. It yields 2.01% for 1 year.
Last year, i bought GREAT205 (https://heartlandboy.com/signed-up-great-eastern-great205/) with my SRS funds. notice how interest rates have moved in a year?
Oh yes, I saw the GREAT205 post! Okay, will probably get the SSB in Feb 2019 using my SRS funds. Thank you!
HI HLB
What are your thoughts of using Endowus (with SRS funds) to buy into diversified portfolios? Are there pros / cons against using that vs. BCIP with the 3 local banks?
Thanks,
J
Hi J,
Yes, I think it is a wise consideration. I believe EndowUs is able to offer different type of portfolios at lower expenses.
I don’t think STI etf is the most efficient way to grow your SRS account.
The STI has been underperforming global markets in the recent years and the only plus side is the stable dividend returns.
Perhaps a better income/dividend providing vehicle like REITs would do a better job
Otherwise robo-Advisors like Endowus/StashAway or Moneyowl offer good exposure to global markets at a cost-efficient level.
Hi Nicholas,
I completely agree with you. When the article was written, the robo-advisors were either not around yet or have not begun offering SRS options!
hi HLB, currently at the moment, is STI etf still your choice to grow your SRS account, or you have already look into other options like REITS or robo-advisors?
Hi Steven,
Good question! Ever since i have written this article, I have invested my SRS funds in REITS as well as endowment policies. I will definitely consider robo-advisers as well
Hi HLB.
I shotlist Fundsupermart(FSM) or Endowus as my SRS ETF investment platform.
Do you have any suggestion?
Thanks for your advice in advance!
Hi Kai,
I am unable to comment on this. Thank you.