SRS is a voluntary savings scheme that is a part of the government’s initiative to complement CPF and encourage Singaporeans to save more for their retirement.
If you’re not currently contributing to an SRS account, find out whether you should have an SRS bank account. But if you do have one, here's how you can get even more out of it to maximise your long-term wealth.
If you're a citizen or PR, once you start contributing to your SRS account, you won't be able to withdraw those funds before the statutory retirement age of 62. For foreigners, you won't be able to withdraw for 10 years from your first deposit. And if you do withdraw before then, you'll have to pay a 5% penalty plus any applicable taxes on the withdrawals.
For foreigners, that 10-year period starts from when you first open an account - even if you only invest $1 SGD! So, the earlier you open an account, the sooner you'll be able to withdraw your funds.This means no touching your funds unless you are extremely desperate. That being said, it is not to say that you should not contribute as much money into your SRS account. This is because ultimately, your profits in your investments go back to you. You are the ultimate beneficiary.
Inflation diminishes the value of your money. This means that as time goes by, the value of your money drops. Likewise, things are going to be more expensive at the time you withdraw your savings from your SRS account.
In addition, the interest rate on SRS funds is fixed at 0.05% per annum. When you consider that inflation is estimated to be around 2%, your money in your SRS account will most definitely lose value over time. Thus, it is not a good idea to simply leave your money in your SRS account and expect your savings to grow.
Singaporeans and PRs can contribute up to $15,300 SGD per year to their SRS accounts, and foreigners can contribute up to $35,700 SGD per year. These contributions are deducted from each year's tax bill. So, if you have enough savings, contribute the maximum amount possible to your SRS account each tax year. This way, you can strike a balance of liquidity and tax reliefs.
As of now, IRAS does not provide a list of approved investment products you can buy. Hence, you should check with your SRS operator for the type of investment instruments that are permitted. SRS operators include DBS Group Holdings Ltd, Overseas-Chinese Banking Corporation Ltd and United Overseas Bank Ltd.
In general, there is a variety of financial products approved under the SRS scheme, including:
- Fixed deposits
- Unit Trusts
- Real Estate Investment Trusts
- Single Premium Insurance
- Index funds and ETFs
For the more conservative investor, you may wish to consider Singapore Government Securities or single premium insurance products, where the overall risks are relatively lower. Even placing funds in a fixed deposit and earning 1.40%-a-year interest could turn out to be a better option than letting your contributions sit idle.
And if you need to see some projections, use the SRS calculator to gauge your expected returns through the years, and check how much tax savings you can enjoy when you regularly contribute to the account.
A financial advisor can:
- Summarise these financial concepts into bite-sized information,
- Explain further where you lack understanding, and
- Work out your risk profile according to different financial goals you may have.
Furthermore, with an independent financial advisor, your options are not limited to what the bank or firm sells. This way, you are able to plan your retirement in a holistic and personalised way.
Timing your withdrawals properly is the key to maximising your tax advantage with your SRS contributions. Unlike with CPF, you can't invest your SRS in property, and nor can you withdraw it for medical purposes. If you don’t meet the early withdrawal conditions, you'll face a 5% penalty, and 100% of the withdrawal would be taxable. And once you withdraw, you can’t contribute again.
When you reach the statutory retirement age of 62, you can spread out your withdrawals over a period of up to 10 years, starting on the date of your first withdrawal. At that point, 50% of your SRS withdrawal will be subject to tax. The best strategy, therefore, is to minimise any income tax during those 10 years by spreading the withdrawals out to withdraw more when you don't have other income streams that year.
Currently, personal income starts getting taxed at $20,000 SGD. This means that, if you don't have any other taxable personal income, you can withdraw up to $40,000 per year tax-free from your SRS bank account, for 10 years.
There’s a lot to consider when optimising an SRS account: from how much you contribute each year, to when and how much to withdraw, and where to invest your SRS funds. But, SRS can be a great way to save more for retirement, especially when you take advantage of the long-term benefits. Stay tuned and connect with us to know more about SRS!