A different perspective on the Supplementary Retirement Scheme

The Supplementary Retirement Scheme (SRS) was started in 2011 2001 and is part of the Singapore government’s multi-pronged strategy to address the financial needs of a greying population by helping Singaporeans to save more for their old age. It is operated by the private sector (mainly local banks).

Participating in SRS is voluntary and you can contribute any amount to your SRS account, subject to a cap ($12,750 in 2015 and $15,300 from 2016 onwards). In 2013, the three local banks administering the scheme said they have seen up to 20 per cent annual growth rate in the number of new SRS accounts opened over the past five years which to me, is a good sign because that shows that more Singaporeans are planning for their retirement.

Why naysayers are against contributing to the Supplementary Retirement Scheme

Despite the increase in new SRS accounts, there are many naysayers who are against the idea of contributing cash to SRS accounts.

Here’s a calculation on tax savings that I’ve taken from OCBC’s website on Supplementary Retirement Scheme based on an individual who earns $60,000 per year (that’s $5,000 per month) and $20,000 in personal reliefs.

supplementary-retirement-scheme-calculations

Naysayers would say that it’s ridiculous to contribute $12,750 in cold hard cash just to enjoy $405 in tax savings, especially the case for the lower-tier of middle income earners. They also argue that the tax savings is minimal when compared to returns generated from investments made with the same amount of money.

It’s really just a retirement savings plan with tax benefits

The way I look at my SRS account, I see it as a retirement savings plan with the added bonus of tax benefits. It acts as forced saving to prepare me for future retirement and I can’t access the money until the age of 62. As a reward for saving for retirement, the same amount is deducted from my taxable income.

Some people see it the other way round, where the sole purpose of having a SRS account is for tax deductions and totally missed the point that it’s meant to complement their CPF accounts and build their retirement funds.

supplementary-retirement-scheme-diagram

Consider the money in your SRS account as a part of your investment portfolio

Using my OCBC Blue Chips Investment Plan (BCIP), I am able to use the money in my SRS account to make regular investments in the stock market. As I am focusing on creating an investment portfolio of ETF index funds, I use the money in my SRS account to purchase Nikko AM STI ETF shares every month. In the past few months where the market is on a downturn, the monthly investment from my BCIP account using my SRS money benefited me because it helped to average down on my Nikko AM STI ETF stock holdings.

In the past, all SRS withdrawals must be made in cash. If money in the SRS account was used in investments, the investments had to be liquidated before the proceeds could be withdrawn in cash from the SRS account.

From July 2015, SRS account holders will be able to apply to their SRS operators to withdraw investments from their Supplementary Retirement Scheme (SRS) accounts without having to liquidate their investments (refer to Ministry of Finance website).

This means that if I reach the age of 62, where I am qualified to withdraw from my SRS account and I didn’t have any urgent need for the cash, I can transfer $40,000 worth of investments from my SRS account to my CDP account. That allows my SRS investments to continue to grow in my CDP account and I can liquidate them when I need the cash. This method of transfer will also qualify for 50% tax concession.

A contingency plan when the Singapore government makes more changes to CPF Life

As we continue to plan for our retirement, the reality is that policies governing our CPF accounts is ever changing and will continue to evolve according to our population trends, e.g. mortality rate, etc.

It’s safe to say that by the time I reach the stipulated retirement age, the age when payout from CPF Life commences is not likely to remain at 65. Having a fully funded SRS account of $400,000, I will be able to withdraw $40,000 from 62-72 without having to pay any taxes. That provides a fallback for me if the age where CPF Life payout commences is delayed by a couple of years.

Conclusion

As someone who is on the lower tier of the middle income class, I still believe that contributing to my SRS account has its merits and will continue to do so until it’s fully funded. I’m also pretty sure that my SRS account will play a pivotal role in my retirement planning many years later.

Are you contributing to your SRS account? I’d love to hear your thoughts.

Leave a Comment:

13 comments
Jasmin says October 28, 2015

I think SRS started before 2011.

Reply
    Mickey J says October 28, 2015

    You are absolutely right! Thanks for correcting me. It’s 2001. I just typed it too quickly and got it wrong.

    Reply
Jasmin says October 28, 2015

Hi Mickey
I thought my memory fails me again.
I view SRS in a slightly different manner.
Each year, I contributed $12750 and from 2016, I will contribute $15300. Ignoring inflation etc, I will have 1k per month when I retire. So each year’s contribution now will be a year of funds to supplement my retirement.

Reply
    Mickey J says October 28, 2015

    Hi Jasmin,

    Thanks for commenting on this post. That is if you ignore the fact that you could choose to invest your SRS money in stocks like what I did with mine in OCBC’s Blue Chip Investment Plan. Because my plan is for the SRS fund to grow itself through investments on top of my yearly top up. Otherwise, there’s no way for me to achieve $400,000 and yet retire early.

    Reply
Lizardo says October 28, 2015

The tax avoidance is even more significant at higher tax brackets.

Reply
    Mickey J says October 28, 2015

    Hi Lizardo,

    Thanks for commenting. I prefer to think of it as a retirement savings plan, which is in line with the government’s intentions when they created SRS. Tax deduction is just a benefit. It’s not the core objective of SRS.

    Reply
PI Trooper says October 28, 2015

I am doing the same. 🙂 let’s hope this invested SRS will grow to a good amount for retirement

Reply
Serendib says October 29, 2015

I’ve been contributing to SRS since 2007, but not always to the limit. Why? Because there’s a decent chance that the $400k limit is exceeded. Even then, if I have other sources of income in SG (eg from property) at the time of withdrawal, I’ll end up paying tax. And there’s no guarantee what the tax brackets/rates will be when we hit 62. Frankly, they should just abolish the income tax on withdrawals.

Reply
    Mickey J says October 29, 2015

    I can see where you are coming from. I guess that’s why I try my best so share ideas about retirement planning and how I go about doing it for myself. However, I do not advocate that everyone should do the same as me because there just isn’t a one-size-fits-all approach for retirement.

    In your case, if you see yourself continuing to work or run your own business at the age of 62 and beyond, then maybe you don’t need $400,000 in your SRS account.

    If I have accumulated $400,000 in my SRS and for some reason, were to continue to work at the age of 62 and beyond, then perhaps I would withdraw $40,000 from SRS and contribute it into my CPF Retirement Account because I don’t need the money (expenses are covered by my salary) and I can let it generate interest until I need to withdraw it. That negates any impact to my taxable income and I wouldn’t need to pay additional tax.

    I can see why the government have income taxes on withdrawals. It’s the only incentive they can give to encourage citizens to save more for retirement. SRS is not unique to Singapore. In US, they have Individual Retirement Account (IRA) that does something similar for US citizens.

    Reply
      Serendib says October 31, 2015

      Yes, it’s similar to the US IRA, but keep in mind the tax regimes are quite different when it comes to equity investments. US levies capital gain tax on cash investments whereas Sg does not. So for us the better option might be to keep it in Low-return investments

      Reply
blancfable says November 8, 2015

I will worry more about the inflexibility of having stick to SGD for the next 30 years in the event of USD appreciation or a Asian financial crisis. But I do agree to treat it as long term investment and for my personal opinion is to keep it small.

Reply
    Mickey J says November 9, 2015

    Thanks for sharing your opinion.

    I do share the same concern as well. I think what’s worth considering is where do you think you will be retiring in future. If you intend to retire in Singapore, then it’s worth keeping most of your investments in SGD and minimise the currency risk in the global economy. I mean, USD could appreciate, we may have another Asian financial crisis, or RMB may replace USD as the currency of choice for the global economy. It’s hard to anticipate what’s going to happen in the next decade and every foreign investment is a really a bet made based on one’s opinion about the future.

    If you intend to retire in another country, then it’s worth considering the impact of SGD versus the currency in the country that you intend to retire in. For example, if you intend to retire in countries like Thailand, is it really that bad to keep your investments in SGD when the Baht continues lose strength over SGD? But if you intend to retire in countries like Cambodia where the preferred currency is USD over the Cambodian Riel, then perhaps you want to keep more investments in USD as a safer bet.

    What do you think?

    Reply
What to read next? My favorite personal finance and investing blogs | singvestor.com says December 16, 2015

[…] Favorite articles: Free Singapore Retirement Planning Simulation Spreadsheet, A different perspective on the Supplementary Retirement Scheme […]

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