Why You Should Set Up a Supplementary Retirement Scheme (SRS) Account

This was originally posted on Planner Bee.

Ever heard of Singapore’s Supplementary Retirement Scheme (SRS)? In short, this scheme helps you build your nest egg by providing significant tax relief and investment options. Here’s why starting an SRS account could be one of the smartest financial moves you can make.

What is SRS?

The SRS is a voluntary scheme aimed at encouraging people to add to their retirement fund, on top of the Central Provident Fund (CPF) scheme, while enjoying additional tax relief.

Managed by the Inland Revenue Authority of Singapore (IRAS), the SRS allows individuals to contribute a certain amount annually to their SRS account, which can then be invested in a range of financial instruments such as stocks, bonds, and unit trusts.

Singapore Citizens, Singapore Permanent Residents (SPRs) and foreigners with any form of income are eligible to make SRS contributions in the present year. Additionally, your employer can also use part of your remuneration to contribute to your SRS account. Since this amount is your remuneration, it is still taxable but you will be granted a tax relief as a result of your employer’s SRS contribution made on your behalf.

Why should I set up an SRS account?

Your SRS account provides more than just a comfortable retirement. Note that the minimum age to start receiving monthly payouts from CPF was raised to 65 in 2018, though this is subject to change.

For SRS accounts, withdrawals are penalty-free if they take place on or after the statutory retirement age (63 effective from 1 July 2022) that was prevailing at the time of the first contribution.

Tax relief

The main draw of making SRS contributions is arguably tax relief.

For illustration, let’s say your taxable income for the year 2020 is S$80,000. However, you decided to contribute S$10,400 to your SRS account. As such, your taxable income decreases to S$69,600.

Let’s take a look at a quick comparison of your gross tax payable, if you didn’t make an SRS contribution. According to the IRAS income tax rates, this would be the amount you have to pay in taxes:

By contributing to your SRS account, you could enjoy tax savings of S$728. For higher-income earners, there could be even more significant tax savings in store.

Flexibility in withdrawals

While the primary purpose of the SRS is to save for retirement, the scheme offers flexibility in withdrawals. Currently, you can start withdrawing penalty-free from your SRS account from the age of 63, with the flexibility to spread out your withdrawals over a period of up to 10 years. This can be particularly advantageous for managing your tax liabilities in retirement.

However, if you withdraw your funds before the statutory retirement age of 63 years old at the time of your first SRS contribution, 100% of the withdrawn sum will have tax imposed and a penalty of 5% applies. You can also make a withdrawal on medical grounds (i.e. if you require money for an operation), or as a result of bankruptcy.

For foreigners, your SRS balance can be fully withdrawn if the following conditions are met:

• Your SRS account has been maintained for 10 years or more from the date of your first SRS contribution
• You are not a Singapore Citizen or SPR on the withdrawal date and for 10 consecutive years prior to the date of your withdrawal
• You make a one-time full withdrawal of your SRS funds

Estate planning benefits

In the event of your passing, the funds in your SRS account can be passed on to your beneficiaries, providing them with a financial cushion. While there may be tax implications for your beneficiaries, proper estate planning can help minimise these taxes and ensure your loved ones are taken care of.

Diversification of retirement income

By contributing to an SRS account, you’re diversifying your sources of retirement income. Instead of relying solely on CPF savings or employer-provided pension plans, you’ll have an additional pool of savings to draw from during your golden years.

Potential investment growth

The funds in your SRS account can be invested in a variety of financial instruments, allowing you to potentially earn higher returns compared to leaving your savings idle. Over the long term, the power of compounding can help your SRS savings grow substantially, further enhancing your retirement nest egg.

How to grow your SRS funds

If you’re looking to grow your retirement funds further, you can consider deploying these tax savings to your existing investments. Leaving this amount idle would likely mean the value of your money will drop with inflation.

With a myriad of investment products available, you can grow your funds with the following options:

• Fixed deposits If you’re more conservative, this option is the safest bet. Although fixed deposits are notorious for their low interest rates, placing your funds in one to earn an average of 1% per annum still beats the interest rate of your SRS funds at 0.05% per annum in your SRS account.
• Bonds SRS funds can be used to invest in several bonds that are listed on the SGX.
• Unit trusts / mutual funds / Exchange Traded Funds (ETFs) To diversify your investments, consider unit trusts, mutual funds or ETFs. Bear in mind that all investments carry a certain risk, so stay prudent about your investments or seek professional advice
• Single-premium insurance plans (both annuity and non-annuity plans) You can choose from short-term endowments or longer-term endowments that offer returns that are higher than your default interest rate on SRS funds. There are even certain policies that provide the flexibility for you to make an annual withdrawal.
• Robo-advisors Robo-advisors are digital platforms that automate your investment portfolios through the use of algorithms instead of active human management, with generally lower fees than actively managed funds. Park your SRS funds into less risky cash management accounts and diversify your portfolio at a low cost with robo-advisors including Syfe, StashAway and Endowus.

How to set up an SRS account with DBS / OCBC / UOB

Setting up an SRS account is a straightforward process. You can conveniently start your SRS account at Singapore’s local banks. You can either apply in person at the bank with your passport or NRIC, or do it online:

OCBC SRS Account

DBS SRS Account

UOB SRS Account

Once your account is set up, you can start making contributions either through cash or via your Central Provident Fund (CPF) savings.

In essence, the SRS comes with benefits of encouraging you to save for retirement while offering perks of tax relief.

The SRS is meant for the long run

Since the SRS is meant for the long run, many may procrastinate acting on it as the scheme does not offer an immediate advantage.

While you may not reap the harvest instantly, a seizable tangible benefit through your tax relief in the following year of assessment provides an extra incentive for you to get started right now.

With the rising costs of living and increasing life expectancy, retirement planning has never been more critical. By setting up an SRS account and making regular contributions, you’re taking proactive steps towards securing your financial future.

It’s as easy as starting with just a spare S$1 today so you can reap the benefits of the Supplementary Retirement Scheme for years to come.

Pro-tip: Lock in your retirement age of 63 by depositing S$1 to your SRS account now, before there are any possible changes to the age requirement!

Have more questions regarding the SRS? Fret not, we’re here to help! Drop us an email at [email protected] and we’d be more than happy to chat!

Read more: A Beginner’s Guide to Investing with Robo Advisors in Singapore