Supplementary Retirement Scheme (SRS)
Asked on 10 Jan 2020
Thinking of how I can maximize the SRS and came across that one can buy an annuity with the SRS. So wanted to check through all the financial upsides and downside. I'm in my late 30s, so basically planning this for the long run.
If your SRS annuity was structured such that the payout period is spread over the 10 years that you intend to withdraw SRS, then you will only need to ensure that you have no other sources of taxable income, and your withdrawal from SRS each year is no more than $40K. Then you will have no further income tax (this is based on current tax bracket, which is subject to change)
If your SRS annuity was structured to pay over a longer period, such as 15 or 20 years, then one workaround is to have the proceeds from the annuity be paid to the SRS account with the bank, but you don't withdraw it yet. So you can let the payouts accumulate in the bank, until there are only 10 years of payout left, then you start to withdraw the SRS monies. Or, as Hariz mentioned, start to withdraw anyway, and when 10 years withdrawal period is up, the SRS account is deemed closed, and you will be taxed on the surrender value of the policy. Only lifetime annuities will not be taxed on the surrender value, and instead, the payouts continue and you will be taxed on the income stream from those payouts. (The exact statement from IRAS is: "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.")
However, to purchase at age 30s a lifetime annuity paying $300/mth guaranteed from 65 onwards will still require a large capital (think 6 figures), which is then also quite difficult to get since you are capped on the amount you can put in SRS each year (unless you found a 10 bagger stock and then cashed out)
There was analysis done (I'm sorry, I don't have the link to it at the moment), but the basic finding is that:
If you are a very savvy investor, the tax savings you gain from SRS, will be negated by the fact that if you could obtain high single digit returns, when you eventually want to withdraw, you will be taxed a large amount as your withdrawn SRS monies will be huge. This tax will be more than what you saved
Thus such a person will be better off just investing more of his/her monies outside of SRS
The person's SRS just needs to grow at a low-moderate rate, such that the value of his/her SRS is around $400K at the point of withdrawal. High growth should be obtained outside of SRS.
Compounding $15.3K at 2.5% for 20 years with regularly injections of $15.3K yearly will amount to $396K at the end of the timeframe
So if you ask me, SRS might be better suited to obtain lower risk or lower return instruments, and especially if you have the horizon to grow it. After all, if you don't need to take risk, why do so? You can also do low risk out of SRS, it doesn't have to be restricted to SRS.
However for someone who started SRS with say, less than 20 years to retirement, then he or she could try to take a little more risk to grow it to close to $400K prior to withdrawal.
All this is subject to current SRS regulations and IRAS tax brackets. If they change, the strategies will change too.
Yes, withdrawals from a lifetime annuity are tax payable at 50% of the withdrawal amount throughout the term.
For retirement income products that pay only for a specific period like 10 or 20 years, you'll get taxed 50% of the withdrawal amount as well, and if the payout continues after 10 years, you'll be taxed 50% of the prevailing surrender value when the SRS account is deemed closed after 10 years. The rest of the payouts after won't be taxed.