Supplementary Retirement Scheme (‘SRS’) Account
Unlike the previous recommendations by Heartland Boy, namely,
- Transfer from Central Provident Fund (‘CPF’) Ordinary Account (‘OA’) to Special Account (‘SA’) and
- CPF Retirement Topping-Up Scheme
this recommendation of utilizing the SRS Account requires a little bit more effort. This is because this is a voluntary scheme and not a compulsory scheme such as the CPF. One has to first apply for a SRS Account with any of the 3 authorised local banks – DBS, UOB or OCBC. Nonetheless, Heartland Boy assures you that this little effort is worth your time as the SRS Account is not just a useful tool to boost your retirement planning, but also a valuable tool to minimize your tax expenses. Here is his review of the SRS Account where all Singaporeans, Permanent Residents and Foreigners are eligible to apply for.
What Is The Supplementary Retirement Scheme (SRS)?
The Supplementary Retirement Account (‘SRS’) is a savings scheme that complements your CPF savings for retirement. It was introduced in 2001 by the government with the primary objective of encouraging the population to save more for retirement. With greater awareness and publicity, take-up rates of the SRS have increased in recent years. To incentivise the public to sign up for this voluntary scheme, the government has dangled the tax relief carrot. (more on that later)
How the Supplementary Retirement Scheme Works
In all honesty, it is not easy to explain the workings of the SRS Account in a single article. In essence, Heartland Boy thinks that the Supplementary Retirement Scheme has 3 sequential mechanisms:
Contribute, Invest, Withdraw
- If the account holder is a Singaporean, he or she can voluntarily contribute cash into it but the contribution is capped at a maximum of S$15,300 per annum. (Note that the Contribution Cap can change anytime, depending on a variety of factors). Note that SRS is also eligible to Singapore permanent residents or foreigners who earns an form of income in Singapore. Their eligibility, contribution and withdrawal criteria could be different from those of Singaporeans.
- This contribution earns 0.05% per annum. However, account holders who have a more aggressive risk profile can invest the contribution into higher yielding financial products such as fixed deposits, stocks and unit trusts etc. Naturally, all sale proceeds from the financial products must be returned to the account.
- Upon age 62, the account holder can apply to start withdrawing the money from his SRS Account over a 10-year period to tide him over his golden years. However, do note that 50% of the funds withdrawn upon retirement would be subject to income tax. For example, if $S50K is withdrawn, only S$25K will be added to your chargeable income for that assessment year.
Diagram 1: Flow Chart of how the SRS Account works
Advantages of SRS Account
For obvious reasons, the greatest advantage of the SRS Account is that it reduces income tax expense. Every dollar deposited into your account reduces your taxable income by a dollar. For instance, you save S$ 1,553 in income tax (11.5% X S$15,300) if your assessable income falls under that tax bracket.
Disadvantages of SRS Account
If you withdraw your funds before reaching age 62, 100% of the funds withdrawn will be subject to income tax. This will effectively negate all the tax relief that you have enjoyed earlier, ceteris paribus. In addition, a 5% penalty is also levied for such premature withdrawals. Therefore, readers should look to set aside an emergency fund first before looking to contribute to their SRS Accounts.
Some people may still baulk at the fact that 50% of the funds withdrawn after age 62 would still be subject to income tax. However, it is actually possible to achieve a scenario whereby none of your withdrawals is taxed. Assuming you are retired and have no income from employment by age 62, you will not pay any income tax if you keep your yearly withdrawal within the non-taxable bracket of S$20K. Therefore, it is possible to accumulate up to S$400K in your account by age 62, and start withdrawing S$40K per annum over 10 years. This scenario is illustrated in the diagram below.
Diagram 2: Withdrawal from SRS Account with NO Income Tax Paid
Theoretically, this S$400K can be an even bigger sum depending on the tax relief circumstances for that year. For instance, the scenario illustrated above does not take into account spouse relief, qualifying child relief etc.
Heartland Boy Enjoyed Tax Relief via SRS Account
Heartland Boy opened his SRS Account last year after he read about it on financial websites. It was a super fuss free event as his application was approved online via DBS Internet Banking. He then proceeded to contribute the money by transferring the money from his DBS Account. He subsequently enjoyed dollar for dollar tax relief this year.
Diagram 3: Heartland Boy enjoyed tax relief from his SRS Account
In addition, he proceeded to link his DBS Vickers trading account with his SRS Account. This allowed Heartland Boy to use the contribution to invest into STI ETF. He made the investment in January this year when STI plummeted to 2700 points. This investment is currently sitting on gains of 11%, much better than the paltry interest rate of 0.05% offered by SRS Account. After witnessing the success of Heartland Boy’s SRS journey, an envious Heartland Girl decided to open her own account too!
Open SRS And Enjoy Year-End Promotions
As an additional tip, these local banks often run year-end promotions to vie with each other to be the best SRS Account operator in Singapore. So take advantage of the freebies given out by the banks (OCBC, UOB, DBS) who are permitted to operate SRS Accounts.
SRS Complements Your Retirement Funds
Young adults should definitely view the Supplementary Retirement Scheme Account as a complementary pillar in their retirement plans. This is in addition to the main pillar that is the CPF LIFE. There is even a nice buffer between the various payout stages, i.e. CPF funds in excess of Full Retirement Sum from age 55, SRS funds from age 62 and CPF Life Payouts from age 65 onwards. Receiving payouts from both CPF LIFE and SRS in one’s golden years sound like a very good idea to Heartland Boy. Indeed, it may not be a bad idea to swallow the bitter pill now and set aside some cash annually to grow it.
*All information is accurate as at time of writing (10 July 2016).
P.S. Find out how Heartland Boy is taking advantage of CPF’s 6% interest rate for his parents’ retirement accounts.
The personal relief at 62 is $8000, in addition to other relief. Thus you can withdraw up to $56K a year without paying any tax for a taxable income of $28K 🙂
However you have to liquidate your holding into cash. As far as I know, you can’t transfer SRS stock holding to regular stock holding.
Thanks for pointing this out!
Hi Wong and Heartland Boy,
1) that $8000 relief for those above 60 is EARNED income relief, so if you are not employed (or self-employed), you dont get this relief. Of course who knows what the tax regime will be like if your retirement is decades away.
2) “From July 2015, SRS members will be able to apply to their SRS operators to withdraw investments from their SRS accounts without having to liquidate their investments. This is applicable for the following types of withdrawals, which qualify for the 50% tax concession” see link for details:
PANG JUNGUO GALVIN says
Hi there Heartland Boy!
I have a question. Under what salary bracket do you think that it is necessary for a SRS account? Assuming that expenses accounts for 50-60%. The rest goes into savings/ investments.
I am thinking of applying for an SRS account, but I have no idea how much should i contribute into it?
Thanks for taking the time!
My personal take is that if your chargeable income (i.e. the residual income that ultimately gets taxed) attracts at least 7% tax, it is worthwhile to contribute to SRS.
As for the amount to contribute, I think it is the individual’s comfort level on the emergency fund that he or she has established.
Thanks for popping by btw!
Hi Heartland Boy
Thanks for the informative read. I have just started working hence if I would want to open a SRS account or to even transfer money to my SA to obtain tax relief, when should I do it? (ie if IRAS have sent me a tax statement already for the year, it means I can only qualify for it the next year?) Also, do I have to inform IRAS after opening a SRS to inform them that I qualify for tax relief or they will automatedly be informed?
Thanks for replying, I m very new to the working world. Thanks
Thanks for dropping by.
1) Note that the transfer to SA is irreversible. So you may want to consider your housing needs when doing this transfer.
2) I strongly encourage you to open the SRS Account immediately, because it locks in the withdrawal age. It may increase in the future but you will not be affected because you have already locked in the withdrawal age when you open the account. For me, I think it is worthwhile to contribute upon hitting the 7% income tax ceiling.
3) You do not have to inform IRAS after opening a SRS account. The departments talk to each other.
thanks so much heartland boy for the prompt and easily understandable reply!
Hi HeartLand Boy
One more question: I think this sounds rather basic so pardon me. When u mean dollar for dollar tax relief does it mean if the taxable amount is X, and if I contribute X into SRS/special account, I pay zero taxes? Or does it mean total income-amount contributed x percentage= taxes at the end of the day
Thanks so much for your time!
If you earn $50,000 in the year, this is your assessable income. You then deduct your Tax Relief, eg: SRS contribution of $10,000. Your chargeable income becomes only 40,000. The tax bracket takes reference from Chargeable Income. No worries
My Sweet Retirement says
I have opened my SRS account too after reading your post.
Hi My Sweet Retirement,
That is awesome! Another pillar to boost your retirement.
My mom told me this is more beneficial or applicable for high income earners, is that true? What are the considerations to think about to see if one should contribute/open srs account? Thanks!
Your mum is largely right. I would think that this is more beneficial for anyone who hits the 11% tax income bracket. However, do not wait anymore as one should open a SRS account immediately to lock in the penalty-free withdrawal age. The penalty-free withdrawal age will be increasing soon.
Is it possible to open an SRS account with DBS and link it to another brokerage from a different bank (e.g. iOCBC) to trade? Thanks.
I think it is possible, although I have not tried it. You should call your brokerage to confirm.
Does it mean tt ur recommendation is having an accessible income of more than 80k (hence 7% and up taxes) would call for SRS topping up?
Yes, that is my personal threshold.