If you are in your 20s and 30s, mastering the Central Provident Fund (CPF) is one of the most important steps you can take to secure a comfortable retirement. A crucial pillar is the Supplementary Retirement Scheme (SRS).
Despite what the name suggests, it’s not just for those nearing retirement. It’s designed to provide an additional retirement safety net beyond CPF savings — with tax relief as the main incentive to save up.
Well, it’s working. The latest data shows an increase in contributions, especially among young people.
The Ministry of Finance (MOF) reported 387,377 SRS account holders in 2022, a 34% increase from the previous year.
Almost one in three account holders were between 18 to 35 years old.
If you are in the earlier phase of your career and haven’t gotten started, here is a primer on SRS and essential tips for making the most out of it.
This article was written by a Financial Horse Contributor.
What is the Supplementary Retirement Scheme?
We already wrote an in-depth guide to the SRS. But in a nutshell, the IRAS website provides a good definition:
The Supplementary Retirement Scheme (SRS) is a voluntary scheme to encourage individuals to save for retirement, over and above their CPF savings.
Contributions to SRS are eligible for tax relief.
Investment returns are tax-free before withdrawal and only 50% of the withdrawals from SRS are taxable at retirement.
The main benefit: you’ll get a dollar-for-dollar tax discount for the amount added to your SRS account.
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How does the Supplementary Retirement Scheme work?
You can set up an SRS account at any of the three local banks — DBS, OCBC and UOB.
Singaporeans are allowed to deposit up to $15,300 into the account each year.
This can be used to invest in products including unit trusts, robo-advisors, SGX-listed stocks, REITs, and ETFs. You can also invest in lower-risk products like Endowment Insurance Plans, fixed deposits, and Singapore Government Securities.
Here is an illustration of the tax savings at work.
And just like that, you’ve slashed a hefty portion of your tax bill.
Topping up your SRS is generally only recommended if you’re above the 7% tax bracket when the tax savings are more substantial relative to the amount you top up. They become more tax efficient the higher up the tax bracket, as illustrated below.
But deciding whether to put money into your account is a personal decision and varies based on your circumstance.
Income tax bracket
Tax savings on $15,3000
Consideration for SRS top-ups
Ability to commit for the long term.
SRS’s biggest drawback is liquidity. Once that money is in, withdrawing any amount before reaching the statutory retirement age will incur penalties. You’ll need to pay income tax on 100% of the amount withdrawn (based on your income tax bracket) — plus an additional 5% penalty on the amount withdrawn.
As such, make sure this is money you can set aside for the long term and is not essential funds. Treat it as buying an endowment or Investment-Linked Plan (ILP). This is money that you are willing to part ways with for a long time.
This is an especially difficult balance to strike in your 20s and 30s. This is a period full of big financial commitments like paying for a wedding and buying a house. Make sure your cash flow doesn’t suffer in pursuit of tax savings.
Should you top up your CPF or SRS?
Deciding between topping up your SRS or CPF Medisave Account (MA) or Special Account (SA) is a common dilemma. Both are great ways to build savings and enjoy tax relief. Choosing between the two boils down to your risk appetite.
In your 20s and 30s, time is on your side to invest your SRS funds more aggressively. If you can stomach the volatility, you can afford to take risks for higher expected returns over the long term.
Investing in equities will give you a better probability of generating 6 to 7% annually, compared to around 4% if you keep it in your CPF MA/SA.
A 2% higher return makes a huge difference when compounded over 30 years.
But if you are more comfortable with the guaranteed returns of CPF MA/SA — a 4% interest is nothing to sneeze at either.
Personal income tax relief cap
Take note that the cap on personal income tax relief is $80,000. This applies across all tax relief claimed for each year of assessment, which includes Earned Income Relief and CPF Cash Top-Up Relief.
The personal income tax relief cap was introduced in Budget 2016.
Working mothers for instance should be mindful of these caps.
Make sure you check the previous year’s notice of assessment, take the amount of tax relief you’re expecting, and factor that into the amount to top up for SRS.
Make sure to deploy your cash
While the tax relief of SRS is the main draw, remember that cash in your SRS account only earns 0.05%. If you’re not investing your SRS savings, you’re losing money to inflation!
According to MOF, 21% of SRS monies are sitting idle in cash, so this is not as uncommon as you’d think.
Why you should top up $1 into your SRS account today
This allows you to lock in your Statutory Retirement Age at 63 today before it goes up to 65 in 2030. In other words, opening an SRS account now will protect you from any subsequent changes in the statutory retirement age.
Top up by 31 December!
With the end of the year approaching, now is a great time to top up your SRS.
Don’t forget to top up by 31 December if you want to enjoy the tax relief.
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