I was doing research on the Supplementary Retirement Scheme the past week, and I must say, the existing content out there is downright criminal.
Given that I’d already spent all that time researching and thinking about SRS, I figured I’d pen an article this week to share my decision making framework for all fellow Singaporeans out there.
Basics: Supplementary Retirement Scheme (SRS)
Very simply, the Supplementary Retirement Scheme is a form of tax planning. Each Singaporean can top up S$15,300 a year into a SRS account, and any amount that you place into SRS is tax exempt. So if your take home pay this year is S$100,000 and you top up the full SRS entitlement, in 2018 you will only pay tax on S$84,700. It really is that good.
The catch here, is that while anything that goes into SRS is tax free, you’re penalized if you want to want to withdraw the money before your statutory retirement age at 62. So if you choose to withdraw SRS moneys before 62, you have to pay a penalty of 5% + your prevailing income tax in that year. Of course, if you withdraw it in a year when you’re unemployed and drawing no income, you only have to pay the penalty of 5%, since your income tax is zero for the first S$20,000.
When you cross 62, you’re able to withdraw the SRS money without any penalty, but 50% of the amount withdrawn will be subject to prevailing income tax, and this 50% waiver will last for 10 years from the time you make your first withdrawal after 62.
Opening an account is as simple as logging in to DBS, UOB or OCBC’s internet banking portal and creating an account. I did it this past week and it literally takes about a minute to open the account. I went with DBS because I’m using their DBS multiplier as my primary working account, and my CPFIS account is with them, so it was really out of convenience. But all 3 banks are absolutely fine, just go with the one you prefer.
The monthly maintenance fees for SRS accounts are waived by all 3 banks, but there will be brokerage fees for when you buy/sell shares or investment products. I think this is fair because even if you’re using CPFIS funds or cash to buy shares, you’re going to have to pay brokerage fees anyway. Anyway the fee schedules for the SRS accounts are here (DBS, OCBC, UOB).
Earlier this week MAS announced that starting on 1 Feb 2019, SRS Funds can now be used to purchase Singapore Savings Bonds. Personally I felt that this was a game changer for the SRS, but more on that later.
When should you use SRS?
There’s no getting around the fact that SRS is primarily used for tax planning, so it only starts becoming attractive when your annual income hits the higher tiers.
I’ve set out the personal income tax rates below:
From YA 2017
|Chargeable Income||Income Tax Rate (%)||Gross Tax Payable ($)|
In excess of $320,000
Don’t forget the table above is on chargeable income (basically take home pay). To get this figure, you take your total income for the year (include all taxable benefits and side income), less off your CPF contribution, and any other tax relief you may be entitled to (eg. NS man relief, children relief etc. You can take a look here for the full list of tax reliefs).
The way I see it, SRS only starts making sense once your chargeable income crosses the S$80,000 mark. When your chargeable income is below S$80,000, you basically have 2 options. First, you can pay the maximum income tax of 7% on your second S$40,000 (first S$40,000 is about a 1.375% blended rate). Secondly, you can top up your SRS, save the tax on whatever you top up, but you pay a penalty of 5% + your prevailing income tax on the sum withdrawn. To me, because your income tax saving isn’t great at this level (7%), you’re still better off paying the income tax, and retaining the full ability to use your money as you deem fit.
Once your chargeable income crosses S$80,000 though, the income tax goes up to 11.5%. To me, that’s when the equation changes, as an 11.5% tax saving is not to be trifled with, and S$80,000 is the tipover point when it starts making sense to top up your SRS account. Needless to say, once you start hitting the S$120,000 and higher brackets, SRS is a complete no brainer, and if you haven’t done it already you really should be taken out back and shot, it’s criminal.
I’ve come up with a very simple 2 step question for Singaporeans to decide whether SRS is for them:
- Is your [Chargeable Income (take home pay for the year)] more than S$80,000?
- If yes, move to question 2.
- If no, congratulations, you have no need for SRS, but do read the rest of this article for future reference.
- What is the value of your Chargeable Income less S$80,000? Do you need this money in the next 1 to 2 years?
- If yes, then you should not be using SRS. Just pay the income tax, and treat it as the cost of liquidity.
- If no, then you should top up the value of your Chargeable Income– S$80,000 into your SRS account, subject to a cap of S$15,300.
A quick note on question 2, if you’re saving up for a big ticket purchase like your first house (or second), my recommendation would be to err on the side of caution. It’s better to pay a bit more taxes now if you may need the money in future. But don’t be too hard on yourself, because a 5% penalty really isn’t the end of the world if you get the decision wrong. And if you’re in higher tax brackets like those 20%-ers, SRS becomes a bit of a no brainer at that level.
Note: In this 2 step process, I’ve deliberately kept age out of the equation, because I felt that the two main considerations here are income tax and liquidity. However as a number of readers have pointed out, age is definitely a factor to bear in mind when making the final decision. When you are younger, SRS as a tax planning tool is more valuable as compared to CPF-SA topups, because SRS gives you the possibility of unlocking the money, albeit for a small penalty. As you get older and closer to CPF withdrawal age, CPF-SA topups as a tax planning tool becomes more and more valuable, because you get the same tax saving, but the fact that the money is locked up is less of a concern.
Let’s run through a very simple example to illustrate the above. There is a boy called Ah Beng. Ah Beng, despite his Beng background, managed to clean himself up nicely after university, and at the age of 30, is drawing a nice income at a big bank in Singapore.
Ah Beng earns S$120,000 a year including bonuses. Based on this salary, he is required to make a S$20,000 yearly contribution to CPF, deducted monthly.
Question 1: Is your [Chargeable Income (take home pay for the year)] more than S$80,000?
Ah Beng’s Chargeable Income is S$100,000 which is higher than S$80,000, so we cross to question 2.
Question 2: What is the value of your Chargeable Income less S$80,000? Do you need this money in the next 1 to 2 years?
Ah Beng’s Chargeable Income less S$80,000 is S$20,000. Does Ah Beng need this S$20,000 in the next 1 or 2 years?
Ah Beng thinks about his personal finance situation. He just purchased a brand new Subaru Impreza that he really likes, and he just received the keys to his BTO in Punggol with his childhood sweetheart. They aren’t planning to have kids yet so he can’t imagine what he would use the S$20,000 for other than to zhng his car. Being a sensible Beng, he figures he really doesn’t need the extra cash and that SRS works for him.
Without SRS, Ah Beng’s chargeable income for 2018 is S$100,000.
His income tax bill is: 3,350 (Tax on first 80,000) + (11.5% * 20,000) (Tax on income above 80,000) = S$5650
With SRS, Ah Beng’s chargeable income for 2018 is S$S$84,700.
His income tax bill is: 3,350 (Tax on first 80,000) + (11.5% * 4,700) (Tax on income above 80,000) = S$3890.50
In other words, by topping up S$15,300 to SRS, Ah Beng saved about S$1760 or a whopping 31.1% of his original tax bill. He can now go out and blow it all on a new spoiler for his Subaru.
So why am I such a huge fan of SRS?
Tax savings is money in your hands now – A lot of people focus solely on making money through investments, but don’t forget that when you save an 11.5% tax bill, that’s basically about 2 year’s worth of 6% annual returns. When you combine tax planning with good investments, you have a very powerful combination. Just imagine making 11.5% on an investment on day one, and then getting to invest all this money in the market over the next 10 years to compound. That’s basically what SRS does.
Unlike CPF, SRS money isn’t locked up for good – I know of a lot of financial bloggers and advocates out there who recommend topping up CPF SA for retirement planning. I’m not a fan of such strategies, for one simple reason. When you top up your CPF SA, the money inside is essentially locked up until your CPF withdrawal age at 55. You really need to be absolutely sure that you have no need for the liquidity, and that’s hard because no one can predict the future. And I’m not even going to express any opinion on the whole debate of whether the CPF withdrawal age or withdrawal policies will change in future.
With SRS, you sidestep this entire issue because you can take the money out any time subject to the 5% penalty + prevailing income tax penalty. So if you miscalculated your expenses and find that in 5 years time you need some emergency cash because you got retrenched, you can just take out your SRS moneys and pay the penalty. That kind of flexibility is incredibly powerful.
It feels good – Okay this last one may just be me. But when you work all year to earn a salary and the taxman comes and takes a chunk of it, boy does it hurt. So it feels extra good when you use completely legal tax planning schemes to save money from the tax man. Every dollar saved from the tax man is a dollar well-earned in my books.
How should you invest your SRS?
This is where Singapore Savings Bond have been a game changer. Before this, there was a real opportunity cost with SRS moneys, because usually you transfer moneys in, and wait a couple of months before identifying a good investment opportunity, during which time it generates a grand total of 0.05% per annum.
With Singapore Savings Bonds, you can now park the entirety of your SRS funds in SSBs while waiting for a good investment. And with SSB’s yielding 2.01% first year, that opportunity cost is a lot lower.
In fact, for those who are a bit more risk adverse out there, the 10 year SSB rates at so close to 2.5% that even if you decide to never buy a single stock with your SRS money, you can just treat it like a variant of your CPF Ordinary Account or a long term bond. You earn 2.5% a year completely risk free, and enjoy the tax savings.
|Year from issue date||1||2||3||4||5||6||7||8||9||10|
|Average return per year, %*||2.01||2.07||2.13||2.18||2.24||2.28||2.33||2.37||2.41||2.45|
How then do I invest my SRS moneys? I touched a bit on my 2019 investment strategy previously, but the past week had led me to the conclusion that the Federal Reserve has made a big big policy mistake. My belief now is that the Federal Reserve is going to hike the US economy into the next recession, so I am increasingly bullish on short term, high quality bonds.
With SRS moneys, that’s very easy. I’m just going to use it to buy SSBs in February 2019, hold them for 2 to 3 years until we have a global recession, before deploying the cash entirely into the stock market.
Regarding which stock to buy, there is no secret to investing SRS moneys, it’s really the same as the rest of your investments. I personally invest in all my shares with a 10 to 20 year horizon, so SRS money for me is no different. It doesn’t matter whether I’m buying DBS with cash or SRS moneys, because I don’t plan to sell it unless something drastic happens to the bank, so I’m able to use both interchangeably. Of course, if I had both SRS and cash sitting around, I’m going to deploy SRS funds first, because the cash on hand is more liquid and can be redeployed to other means.
Note: As an additional note, it is actually best not to use SRS funds to buy anything that is likely to do frequent rights issues (ie. REITs), simply because if they do a rights issue, and you don’t have excess funds, you’re stuck in a strange situation of having to top up your SRS just to subscribe for the rights. Technically speaking, it is also best to buy “growth” stocks for capital gains rather than yield stocks, because any dividends you receive go into the SRS account, and if they’re an odd number you will be left with an awkward sum just sitting there earning 0.05% p.a.. Unfortunately, there are no real “growth” stocks on the SGX (SRS Funds cannot be used for foreign listed shares), so personally, I will just use it to buy Singapore stocks, but will not use them for REITs.
When is the best time to top up?
The best time to top up SRS funds is in December of each year (as close to 31 December as you can without missing the deadline). This allows you to maximize the use of the cash throughout the year, and also to postpone the decision for as long as you can, in case personal circumstances change such that you need the extra liquidity. There’s really no reason to top up SRS any earlier because the tax assessment only kicks in in April the following year.
Full disclosure, I’m not getting paid by the government or CPF for this post. But I am a huge fan of the SRS because from a tax efficiency perspective, it’s a vital tool for any working Singaporean. Companies spend millions of dollars hiring tax consultants to reduce their tax bill, but as individuals, we don’t have the same luxury. So it’s really up to us to look out for our own interests when it comes to tax, and SRS is by far one of the best ways to do so. Not everyone here may find SRS useful to them at this point in their life, but it’s still important to be aware of its existence, so that a couple of years down the road when your income increases significantly, you know of the ways to minimize your tax bill.
Till next time, Financial Horse, signing out!
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Think it’s worth mentioning the amount withdrawn will be subjected to the prevailing tax, though there is a 50 percent discount.
I think there should be a cap amount to have in srs to avoid tax in the future which may rise. A v safe amount will be 400k, withdrawing 40k per Yr at no tax (assuming no income).
Also, maybe srs should start when you are in 40s to maximise the tax returns as u have higher income
What do you think?
Yes you are right, thanks for pointing out the 50 percent discount issue, I’ve updated the article accordingly.
Actually, I thought SRS is helpful when you’re young, and CPF-SA topups are useful when you’re older, because when you’re older the CPF-SA lockup becomes less of an issue. Although that said, I think the overriding consideration here is the chargeable income, because once your annual salary hits a certain level, it makes sense to use both SRS and CPF-SA for tax planning purposes.
It’s a really good point on the cap amount. As you mentioned, 400k is a very safe amount assuming the full 10 year withdrawal period after 62. However, because most of the SRS funds will likely be deployed in long term shares, it can be hard to predict how quickly the assets will grow. My thinking is that SRS should still be maxed out if it makes sense from a tax planning angle, because if you’re saving 20% tax, it’s still a lot cheaper to pay a 3.5% rate on the SRS funds withdrawn during retirement.
Amazing question though, thanks so much for sharing!
Thanks for the detailed explanation. Maybe you can explain why chargeable income of more than 80K calls for the SRS? Any math behind this?
No math to back it up unfortunately. It is just my own opinion that once your incremental tax rate hits 11.5%, that to me is the point where locking it up in an SRS where it requires a 5% + prevailing income tax to unlock, is worth the hassle.
Of course, if you think that you may need the cash in the next few years, it may take a higher income (and tax rate) before you’ll be fully convinced to use SRS.
My Maths over here is, at 11.5% income, once you hit 8% p.a increment per year, your tax savings in the 10th year using rule 72 would have double.
Yep, which is why SRS is so powerful if used properly. 🙂
When we deploy funds in SRS to buy stocks, is that consider a withdrawal and that we will be subject to penalty?
No it’s not a withdrawal, but of course there are brokerage charges associated with buying the shares. It’s only considered a withdrawal when you withdraw cash from the SRS Fund entirely (eg. you withdraw money from the account to fund a holiday).
May be there is another point worth considering. The prevailing tax (with 50% discount) upon withdrawal and/ or 5% penalty upon early withdrawal is not only applicable to the original fund transfer into the SRS account, but also applicable to the subsequent interest/ dividend earned or the capital gain generated from the SRS fund. So if the person is very competent in managing the fund in his/her SRS account, the benefit of tax saving may not be so great after all in the long term.
Yes, that’s a good point. Although I would think that’s a very pleasant problem to have. As another commenter mentioned, another risk is that the tax rates will change when one hits retirement. Ultimately though, it’s really about balancing the risk and benefits here. I still think the tax savings upfront is a very powerful tool, and I would still do it once my tax crosses into the double digit brackets.
Ed posted a good point. If we contribute too early and invest too early, we may hit more than 400k once we reach 62. Way be hit with higher tax bracket during that time and also need to take into considerations the possibly of gov increasing tax rate.
Agreed on this, but I consider that a happy problem to have. One could always slow the pace of withdrawal and leave more money in SRS to compound for the next generation. The way I see it is that when I’m 62 and my key consideration is how to take money out of my accounts in the most tax efficient manner, I’ve more or less achieved much of what I want from my investments. 😉
Actually, if you are so worried on tax, you can still buy Annuities to increase the life span of SRS withdrawal.
Also, the tax you save now (11.5%) is worth 22% after 30 years. Paying a slightly penalty (if you ever hit $1million in SRS funds alone) of 7% tax is a much happy problem to have. (and that’s not Including annuity bought). There are many many ways, but most people, if your investment attunement is so good, just contribute for 1 year and hit 1 million then.
Agreed. The key point here is that the tax savings is money that compounds over time, so the tax you save now is actually worth a lot more in the future. Of course, it does depend on how well your investments do!
No maths is required imho. Simple analogy
11.5% tax saved, compared to paying 3% tax (annual income in 40,000) + 5% penalty, is 11.5-5-3= 3.5% tax saved.
Your blog rocks. Appreciate the effort and thought you have put in 🙂
On stock selection using srs funds, my thoughts are that you would do it slightly differently. Since the money is locked up for a long period of time (unless you pay the 5% + applicable tax), won’t it make more sense to buy only stocks for capital appreciation? And buy the dividend yielding stocks using cash in your normal bank account?
Reason being, you won’t be able to do much with the dividends received in your srs account. For example, not likely to be large enough to buy more stocks and can’t spend the money as well. Also, for reits, you will have to Top up your srs if you wanna subscribe to a rights issue.
That’s a really good point now that you mentioned it. Yes, you are absolutely right, SRS should be used for stocks with capital appreciation if possible. Unfortunately, Singapore doesn’t really have such “growth” stocks, and most of the Singapore stocks are all dividend plays. Perhaps if they allowed SRS moneys to buy something like that S&P500 or NASDAQ…
Does it mean that if i am going into 53 yrs old come 2019 o better off contributing to CPF-SA account instead since there will b 2 more years before i retire ?
Yes, pretty much. But if you income is high enough, you can consider using both CPF topups and SRS.
what do you mean there are no real growth stock? I also think US and HK have better, bigger and more innovative companies
Well, my thinking is that a true growth stock is something like a Netflix, Amazon, Google etc. But yes, I absolutely get that this is an overgeneralisation, and there are definitely “growth” stocks on the SGX, just not on the same scale as those in US or China.
[…] I was looking around for great Singapore dividend stocks to put my SRS funds in the past week. And I must say, when you google “Top Dividend Yield Stock Singapore” […]
Example when i’m 63, can i transfer out all my shares from SRS to CDP or any brokerage account? will there be a penalty?
Yes, that will be viewed as a withdrawal. So 50% tax waiver for everything withdrawn, but no penalty fee. Why would you want to do this though? Why not just leave them in SRS if the intention is to keep the investments?
bcos there’s a 10 year withdrawal limit where u gotta take out all your $,
If i take out all at 73, i think will be tax much more if i’m not wrong.
And also trading like buying/selling, commission fees is higher compare to using cash upfront account.
THats why prefer to transfer out to CDP to keep cost low.
The tax is basically the income tax. If you expect to be paying significant income tax at 73, then yeah this could actually be an issue.
The transaction fee is a good point, thanks for raising it. From what I recall, you should be able to transfer it out no issues. Worst case, you can also sell them all and buy them all back if the bank doesn’t allow.
1. The stocks i buy using SRS monies, from DBS Vickers, shares will park under CDP or custodian account?
2. Which is the cheapest brokerage or way to use SRS to purchase stocks?
Hi! Replies below:
1. Under your SRS account, held by DBS. So it’s custodian if I’m not wrong.
2. Only the 3 local banks can create SRS accounts, and their brokerage fees are the same. Just pick the bank you like the most (UOB, DBS, OCBC). 🙂
Hope this clarifies!
What do you think about investing one’s SRS funds into Stashaway (either DCA or lump sum) to gain some exposure to foreign markets?
What do you think about investing one’s SRS funds into Stashaway (either DCA or lump sum) to gain some exposure to foreign markets?
I think unless your SRS has large sums, the fees for StashAway can go quite high (up to 0.8%). I would rather just use SRS funds to buy local dividend stocks, and invest in foreign markets with free cash, to avoid the fees.
Thank you for your reply. It just seems to me that there are limited options as to how I can invest the SRS monies.
One option I was thinking of is moving my STI ETF funds to SRS (currently in POSB IS) and also purchasing Lion Global All Seasons (Growth) fund for some foreign exposure. Otherwise, my exposure to the Singapore market is pretty high…
Do take note that there is a Personal Income Tax Relief Cap of S$80k. Once you hit that there is no benefits contributing to SRS.
From the Year of Assessment (YA) 2018, the total amount of personal income tax reliefs which can be allowed is subject to an overall relief cap of $80,000 per YA.
Thanks for the share! For me personally I’m nowhere near the $80k tax relief. How do people get that high?
Possible for adult children with maximum tax relief from CPF, SRS and parents.
Can I ask what happens to my srs investment if I die? Can my beneficiaries inherit the shares?
Yes, dealt with via your will I believe.
Hi! I bought some REITs which have paid dividends. While the dividend payments are reflected on my account I don’t seem to be able to use the cash to reinvest or transfer out. Is it with SRS? Vickers? Anything I should/could do to reinvest?
Yes they should be in your SRS account. You can use your SRS linked brokerage to reinvest it (eg. DBS Vickers or any of the other 2 local banks).
If not sure you can ask your stock broker, they will be able to guide on the exact steps. 🙂