Does this describe you: you have worked for a number of years, your income is moving up and so is your income tax bill, and the last time you received your NOA (Notice of Assessment) from IRAS in the middle of this year, you asked a friend for ways to reduce your income tax for next year. That is probably where you heard about this scheme called Supplementary Retirement Scheme (SRS). A few months on, as the year-end deadline for SRS contribution is approaching, you still haven’t made a decision and are on the fence about whether to contribute.
If this is really you, I hope this article can help you to make an informed decision!
The SRS is a voluntary scheme by the Government to encourage us to save for retirement, over and above our CPF savings. You can open an SRS account with any of the 3 major local banks – DBS, OCBC, and UOB. After it is opened, it will effectively look like another bank account on your ibanking login page. To top it up, simply do a sum transfer into your SRS account via ibanking.
1. Potential Tax Savings – is the money saved worth the hassle?
Every dollar of SRS contribution will reduce our income chargeable to tax by a dollar in the next Year of Assessment (YA). The maximum SRS you can contribute for 2018 is $15,300 per year for Singaporeans and PRs, and $35,700 for foreigners. If your marginal tax bracket is at 15% (i.e. chargeable income from $120,000 to $160,000) and you contribute $15,300 to SRS this year, you can enjoy $2,295 in tax savings next year, it is still quite a handsome sum.
To calculate your potential tax savings, you can use this handy calculator from OCBC Bank.
Note that for YA2019 (for income earned in 2018), your personal income tax relief cap will be $80,000.
2. Liquidity – do you have foreseeable cash need in the near future?
Secondly, the benefit of tax savings should be balanced against your need for liquidity. Monies contributed to SRS cannot be withdrawn without incurring penalties before the statutory retirement age of 62. Premature withdrawals are not only taxed 100%, but also incur a 5% penalty. Hence, you should not be contributing large sums to SRS if you have immediate or foreseeable cash needs. You should build up a comfortable emergency fund before contributing to SRS. In other words, the amount contributed should be saving you intend to withdraw for your own retirement in years to come and not money that you may need in the foreseeable future.
3. Action – how can I grow my SRS to meet my retirement needs?
If SRS contribution is left untouched, it will only be earning the bank interest rate, which does not make financial sense in the long run. There are many other ways to make better use of your savings, including shares, unit trusts, insurances, bonds, and fixed deposits. The good news is, investment returns are accumulated tax-free and only 50% of the withdrawals from SRS are taxable at retirement. You can also choose to withdraw your SRS investment at the stipulated retirement age in the form of cash or investment (i.e. transfer the investment out of your SRS account).
At Providend, we invest our clients’ SRS savings using cost-efficient and globally diversified funds to help them meet their retirement goals. These funds generally take a long-term approach toward investments, without market timing and, most importantly, employ evidence-based methods – meaning that they are backed by research and data.
I have shared 3 key considerations. There are also other rules on SRS such as treatment for early death, migration, and bankruptcy. You can also read about them at the Ministry of Finance’s website.
Alternatively, if you find that contributing to SRS does not make financial sense for you at this point in time, you could consider donating to approved charitable organisations. You stand to receive a 250% tax deduction on every dollar donated. Since we are approaching the festive season of giving, why not?
This is an original article contributed by Loh Yong Cheng, Client Adviser at Providend, Singapore’s Fee-only Retirement Financial Adviser.