Supplementary Retirement Scheme (SRS)
Asked on 29 Aug 2019
I’d just gotten my resale flat, and I’ll be leaving a small amount of money in my CPF OA just in case. Since I am opting to pay my monthly payment using my OA monthly contribution, I feel like I should start contributing to either SRS or RSTU since I won’t be gaining as much interest in my OA. Which one would be a wiser choice?
Depends on your need for liquidity. RSTU is irreversible while SRS though a bit painful, it is still liquid with a penalty.
If tax is your concern and you're comfortable with investing your SRS and earning a higher return than Special Account, go with SRS.
If you think 4% guaranteed is a great deal and you really don't need the liquidity, go for RSTU.
Too many acronyms flying around, I had to google them so might as well write it down here so it's easier for other people to reference.
RSTU - retirement sum topping-up scheme
from what I've read, means top-up to your CPF Special Account (SA) and get guaranteed returns that account.
It cannot be withdrawn in cash or used for any other purposes such as education, investment, insurance premium payments, housing etc.
If you are making cash top-ups for yourself, you can enjoy tax relief equivalent to the amount of cash top-ups made, up to $7,000 per calendar year.
SRS - supplementary retirement scheme
can withdraw, but 5% penalty and the money withdrawn will immediately become taxable (might be quite painful if you lump sum take out 6-digit or more, approx 10% income tax)
max top up per year is $15,300
I always prefer SRS over RSTU because CPF is fixed. You cannot take out money from CPF if you have emergencies of any nature, good or bad.
You can take out money from SRS in emergencies, by paying a 5% penalty. The penalty may be high, but in emergencies, at least you have this option.
A business opportunity, an investment chance, a good deal...
Or a medical bad crisis, a family crisis etc.
I prefer that tiny bit of flexibility anytime.
PS: Plus SRS money can be used in other funds and stocks, potentially generating higher returns than RSTU
I would say do RSTU, then if you have balance, SRS.
1) You will definitely need to elect the CPF life payout, so might as well hit FRS first to ensure a good payout.
2) Once the Medisave hits BHS, the excess is channelled to SA unless SA is at FRS. When SA > FRS, the excess of Medisave contributions go to OA, which you can use to build more buffer for the HDB.
3) Once you hit FRS, that would mean the amount in your OA can be withdrawn. This is the most important reason I am pushing this direction because you can withdraw the excess from OA at 55, versus 62 for SRS (could be later in future). At 55, you could a) withdraw from OA to fund tertiary education for your kids, b) if no need, take the OA as a spare bank acct earning 2.5% for doing nothing, or... just enjoy life.
4) 50% of SRS withdrawals will be taxed. CPF built up balances attract no tax.
5) A lot of folks may not know how to invest properly using SRS. At 4%, the SA offers an interest rate that even the current dividend yield of STI ETFs cannot match. It is very very very difficult to consistently beat risk free 4% over 10+ years.
If your tax bracket is at 11.5% and above, I would just opt for both and maximise them. (if your cash flow allows it).
If it's below, it depends on what you want to achieve. Have a small amount in SRS first to lock in the withdrawal age before it increases.
There are two ways to go about doing this.
(1) IF you are hitting FRS (full retirement sum) and BHS (Basic health care sum) fast, I would opt for RSTU route since the additional OA can be used to clear your mortgage through partial repayment.
SRS has tax deference, which is less useful if you hit it higher than RSTU.
(2) Find me and sit down for a strategy discussion. You can email me at [email protected]
As a short answer, it depends on your income bracket.
If you are below the 7% tax bracket, then I would highly suggest you keep cash. You could use this to do investments, which can vary depending on your risk tolerance and time horizon needs.
If you are above the 7% tax bracket, you can consider looking at SRS. Some people who are more risk-averse might start putting into SRS at this point for tax savings. But do remember to invest your SRS, as they do not pay much interest in that account. The benefit of SRS is that you can choose to do withdrawals with a penalty, or you can use it for your retirement needs at a reduced tax rate.
If you have maxed your SRS contribution for the year, then you can consider CPS RSTU.
My suggestion is to find someone who can look at your numbers and provide options. In the end, your financial philosophy plays the biggest role. Don't follow another person's solution blindly without understanding why.