Why You Should Open Up An SRS Account Today

Merry Christmas! I hope, over the past few days, that you've had the good fortune of spending time with your friends and family because I have!

SRS. The Supplementary Retirement Scheme is, in the words of the IRAS website, a voluntary scheme to encourage individuals to save for retirement over and above their CPF savings. Unlike countries like the US, the investment returns from your SRS account are not taxable but in fact, help you to defer tax and only 50% of your withdrawals are taxed.

The SRS also allows you to withdraw monies for a penalty-free 10 years after your first penalty-free withdrawal at or after the statutory retirement age. After which, the balance of the monies will be subject to prevailing taxes on other types of investments. A thing to note is that annuity plans purchased using SRS monies will forever be deemed penalty-free, where only 50% of the withdrawals are taxed.

Reason 1: It Facilitates Saving For A Comfier Retirement

A plane travelling into the sunset doesn't really tell us much, but not to worry, because it has everything to do with a comfy retirement.

We know that the SRS is an account much like your CPF account where you are able to make top-ups, invest in equities as well as buy endowment or whole life policies for yourself.

Let's do the math, shall we? A male individual, aged 25, fresh out of university would earn around $3,000 a month. $600 goes into his CPF, $1,000 into his expenses and around $500 into his BTO flat (assuming he gets a 3-room in a neighbourhood like Hougang). That leaves him with $900 for leisure, investments and what-not.

Let's say he puts in $830 a month into his SRS account over the years, with no increments or decrements, till he is 65. By the end of his working life, he would have around $398,400 (Assuming he doesn't even invest). Upon retirement, he can withdraw around $40,000 a year for the next 10 years and not be taxed for anything at all. But I'll come to that later.

With such a system in place, we see that the SRS incentivises people to save for their retirement, and knowing that this individual has a career ladder to climb, his salary would likely not stay stagnant at $3,000 for the rest of his life, making the $830 a month saving a rather doable commitment.

You may be asking why is it that this gives a comfier retirement, that's because they can make withdrawals without having to think too much of paying taxes and also having something to supplement his CPF withdrawals for, perhaps nice trips overseas during the earlier days of his retirement.

Reason 2: You Get To Save On Taxes

I know, a picture of Leonardo DiCaprio as Jordan Belfort isn't the aptest picture but we all know that the man was able to live a rather comfortable life after hustling in more ways than one.

But enough of that, remember when I mentioned that you can defer taxes? This is where it comes into play. When you put money into your SRS account, you qualify yourself for a personal income tax relief for however much you put in. So if you earn $95,300 a year and you deposit $15,300 a year into your SRS account, you'd only be taxed as if you earned $80,000. This means that you get a $1,760 tax deferment, where you pay less tax for that year.

Cumulatively, all these savings will add up and every dollar that doesn't go to Ah Gong, goes back into your own pocket.

But that's not all, you see. When you withdraw your SRS monies, only 50% of your money is taxed, so that means if you withdraw $40,000 a year, you only get taxed for $20,000, assuming you have no other income, meaning that your tax for that year would be $0.

This boils down to you finding the sweet spot of how much you can save a year and how much you look to withdraw during your retirement to get the most out of your tax savings.

Reason 3: You Can Invest Your SRS Monies

The good thing about schemes like CPF or SRS is that, while you may incur penalties for withdrawing money or downright have the inability to do so, you can still invest your money into the stock market or buy insurance policies that have some sort of payout.

This gives you a sort of flexibility whereby you can at least make your money work for you while it is taking an extended holiday from your pocket.

Conclusion

Ultimately, the main goal of the SRS is to help you get taxed less while also allowing you to have a higher sum dedicated solely to your retirement.

Upon writing this, I also realised that the marginal benefits are skewed towards the higher income brackets of society whereby they get higher tax savings. A person earning $120,000 a year, versus a person earning $40,000 a year would see vastly different amounts of tax deferment on the money they put into their SRS.

All in all, opening an SRS account and putting a dollar in locks in the current statutory retirement age, which if I recall correctly, is 65, and further changes to the statutory retirement age will not affect your SRS penalty-free withdrawal age. So what you can do right now is to do exactly that with one of the 3 local banks (DBS, OCBC, UOB) and have your own SRS account today!