Why SRS accounts are a good way to save

[sgd]

What many people do is to use CPF to buy property and then collect rent in cash.

That's one of the ways, but looking at these guys ah even this I think one day they will try to restrict.

But not all can do this, if they rent out the entire house means they themselves have to stay somewhere else.

[chialc]

But not all can do this, if they rent out the entire house means they themselves have to stay somewhere else.

sgd,
what many people did was:
1. get a heavily government subsidised HDB flats as early as possible
2. stay for at least 5 years
3. aggressively save money to buy a condo
4. rent out their HDB and stay in condo

Now, much more difficult due to the 8 rounds of cooling measures.
Funny thing is actually not because they can not afford it,
rather, they are bogged down by the difficulties in deciphering/walking thru the maze of all these 8 cooling measures.

Too complex and so they choose to continue to work hard and shelf their Singapore dream a little bit longer.

LC

[specuvestor]

You could also allow your kids tuition fees to be funded from the CPF account. Yes repayment is necessary but it frees up cash flow to use for other things while they are studying, and if it is your intention to fund their university anyway, just give them the cash difference when they are buying a house to make up for the deficit later.

Actually this scheme is a good excuse for parents to get back their money from the children - "I've got no money to send you to tertiary except CPF, but govt say you have to pay back, not I say one". Cut out all the awkwardness and niceties.

At that age it is about time they learn to stand on their 2 feet anyway and not take things for granted. Paying back their first loan probably also teach them what is burden and why debt is not nice

[banker]

IMHO, for PMETs earning about 100-150kpa, exhaust the following options first before considering SRS as a tax saving tool:

1. CPF MA-VC (whenever below min sum)
2. CPF SA-VC of 7k to your own CPF SA

You achieve the same tax saving but:

1. No 50% tax upon death or use of CPF-MA for hospital bills, insurance etc
2. It helps to achieve your CPF-SA min sum without pledging your property at age of 55
3. If you want to use CPF-OA to fund 2nd property, (2) comes in handy

Agree with d.o.g that if income below 100k or more than 150k don't even bother

If the annual income is about 100K or more, I guess no tax savings for voluntary contribution of 7K to own CPF-SA as they easily hit the annual CPF contribution cap...

Can someone pls correct me if I'm wrong?

[WolfT]

IMHO, for PMETs earning about 100-150kpa, exhaust the following options first before considering SRS as a tax saving tool:

1. CPF MA-VC (whenever below min sum)
2. CPF SA-VC of 7k to your own CPF SA

You achieve the same tax saving but:

1. No 50% tax upon death or use of CPF-MA for hospital bills, insurance etc
2. It helps to achieve your CPF-SA min sum without pledging your property at age of 55
3. If you want to use CPF-OA to fund 2nd property, (2) comes in handy

Agree with d.o.g that if income below 100k or more than 150k don't even bother

If the annual income is about 100K or more, I guess no tax savings for voluntary contribution of 7K to own CPF-SA as they easily hit the annual CPF contribution cap...

Can someone pls correct me if I'm wrong?

7k topup to SA is a special scheme, it has got nothing to do with the VC. It has nothing to do with annual income.
It provide tax-saving thats all.

[banker]

IMHO, for PMETs earning about 100-150kpa, exhaust the following options first before considering SRS as a tax saving tool:

1. CPF MA-VC (whenever below min sum)
2. CPF SA-VC of 7k to your own CPF SA

You achieve the same tax saving but:

1. No 50% tax upon death or use of CPF-MA for hospital bills, insurance etc
2. It helps to achieve your CPF-SA min sum without pledging your property at age of 55
3. If you want to use CPF-OA to fund 2nd property, (2) comes in handy

Agree with d.o.g that if income below 100k or more than 150k don't even bother

If the annual income is about 100K or more, I guess no tax savings for voluntary contribution of 7K to own CPF-SA as they easily hit the annual CPF contribution cap...

Can someone pls correct me if I'm wrong?

7k topup to SA is a special scheme, it has got nothing to do with the VC. It has nothing to do with annual income.
It provide tax-saving thats all.

Thanks, Got it

[greengiraffe]

http://www.businesstimes.com.sg/young-in...ent-scheme

Not just Some Retirement Scheme
Beyond the tax carrot, think of the SRS as insurance against having no income

By
Cai Haoxianghaoxiang@sph.com.sg@HaoxiangCaiBT
BT_20141124_HXSUPP24_1380250.jpg For many income-earners, the benefits from tax deferment arising from the SRS, especially from the tax exemption for half of monies withdrawn upon retirement age, should outweigh the disadvantages of early withdrawal penalties. FILE PHOTO
24 Nov5:50 AM
'I HAVE finally set up my SRS account!" I texted some friends and colleagues excitedly after putting some money in the Supplementary Retirement Scheme (SRS), a little-known and widely misunderstood government savings and investment vehicle that gives attractive tax benefits.

Those I asked were financially savvy people in upper middle-income jobs earning an income which makes the scheme's tax savings worthwhile.

They could also use the money saved inside to invest in the stock market, which some already do.

But their replies weren't too encouraging.

"What's that?" was a standard response.

"This is a US thing?" said one.

"This is the one for your parents?" asked another.

"I don't have a DBS account," someone said.

"I need the money to buy a house," was another common reply.

After 13 years in existence and numerous articles about it online and in print, the SRS is still largely unknown among the general populace.

Even if people know that it is linked to retirement, they have very little idea how it works or how they can benefit from it.

This is a pity. Setting up the scheme takes just minutes if you have an Internet banking account, but the benefits can last a lifetime.

As long as you contribute to it before the end of every year, you will be eligible for tax savings for the following year of assessment - hence the timing of this column, before people go off for their year-end holidays.

The biggest misunderstanding of the scheme is that you cannot withdraw your SRS monies early.

You can actually withdraw anytime. But if you withdraw before the statutory retirement age from the time of your first contribution - currently age 62 - the full sum will be subject to income tax, and an additional 5 per cent penalty is imposed.

Thus people think the penalties are too onerous. Why lock up your money when so much is already locked up with the Central Provident Fund (CPF)?

But they are missing the point. The SRS can be used to buy stocks, funds, and even life annuities. It is, at first glance, a long-term savings and investment scheme with a tax bonus.

While money used to top-up CPF accounts can also give you a tax benefit, CPF monies are harder to get out than SRS monies.

For many income-earners, the benefits from tax deferment, especially from the tax exemption for half of monies withdrawn upon retirement age, should outweigh the disadvantages of the early withdrawal penalties. The scheme, explained in the other story, is especially powerful in Singapore where there are zero or low taxes on a substantial amount of annual income.

In fact, if you consider yourself a long-term investor with a time horizon of 20 to 30 years, the psychological deterrent of early withdrawal can actually work in your favour. You will not be as tempted to sell at the bottom and buy at the top. Your SRS portfolio might outperform your regular portfolio, simply because stocks are more likely to be left alone to generate dividends and grow.

The three local banks operate the SRS scheme. Right now, they are offering vouchers or cash incentives for people to sign up.

Sometimes, they will take the opportunity to persuade you to buy insurance or unit trust products with your SRS monies. Think carefully if they are suitable for you.

But if you buy stocks with them, the transaction charges are lower compared to most online brokerages. However, there are service fees of S$2 per counter per quarter. So it is not advisable to buy an excessive number of counters for your SRS portfolio.

Worst-case scenarios

What are the worst-case scenarios for someone using the SRS? There are a number that come to mind.

The first is where a worker suddenly needs the money before retirement but is still liable to pay taxes in the same bracket.

In that case, he will not only have to incur the 5 per cent early withdrawal penalty, but will also be taxed on the amount he withdraws. This means he has effectively made a 5 per cent "loss" on his decision to use the scheme.

The second is more unusual, but not beyond the realm of possibility. This is the "late bloomer" scenario where you may have hit retirement age, but still continue to work and earn far more than what you previously did when you first contributed to the SRS. At the same time, tax rates move up.

Suppose when you are 65, you are the director of several company boards, on top of a salaried position that gives you a substantial paycheck.

You are at the peak of your career. But at that time, increasing social welfare expenses, severe income inequality and a change in political sentiment force the government to raise marginal taxes on high-earners like you to, say, 40 per cent.

Suppose you have steadily put in S$12,750 a year from age 30, and the money compounds at 5 per cent a year. You will have S$1.15 million by the end of your 65th year.

If you need to withdraw the money in one lump sum, you will be taxed on half your money withdrawn. If your marginal tax rates are 40 per cent, your effective tax rates are 20 per cent. If you haven't spent too much time contributing to the SRS from the 20 per cent tax bracket, you will be worse off, even with the tax concession.

High-balance problems

This leads us to the third worst-case scenario. This is when you are wildly successful with your SRS investments even though you put in relatively little in the beginning.

If you make millions of dollars with your SRS monies, then you are effectively letting yourself be taxed heavily on the capital gains when you withdraw what you have made - as income. In that scenario, you would have been far better off investing outside of the SRS system, where there are no capital gains taxes.

This is the "implicit capital gains tax" problem that was hotly discussed when the scheme was first introduced. But the Ministry of Finance had pointed out then that investors are putting in pre-tax dollars with the scheme as opposed to after-tax dollars outside. And the 50 per cent concession on what is taxable upon retirement means most retirees are unlikely to pay any taxes, it said.

If you have a high balance, one possibility to save on taxes is to buy a lifetime annuity product to spread payments out. But you will still be effectively taxed on half the annuity's payouts every year.

Your SRS monies also form part of your estate upon death, with 50 per cent of the withdrawal subject to income tax. The withdrawal happens in one lump sum. This may not be the most tax-efficient estate planning vehicle.

There are other minor problems to watch out for.

For example, you might have already hit the maximum contribution cap for the year, and are fully invested in a company. But the company does a rights issue. In that event, you will have no choice but to sell your rights entitlements and suffer dilution, or sell some other investment to free up cash to subscribe to the rights.

The best-case scenario appears to be for a high-income earner to get the maximum tax benefit every year, and reach age 62 with around S$400,000 in his account. Assuming this high-income earner stops working immediately at age 62 with no further income, and assuming whatever is left does not grow further, he can enjoy S$40,000 a year tax free if he spreads out the withdrawals evenly over the maximum 10 years.

This explains why the SRS is more popular with those in their 40s and 50s. They are more likely to be in a situation where they reap substantial tax savings, while they are not too far away from the retirement age. So they are not likely to run the risk of having too much in their accounts.

SRS is insurance

Given these worst-case scenarios, it might be more helpful to think of the SRS as a form of disciplined saving, and as an insurance mechanism to guard against having no income.

After all, most people do not know if a job will still be waiting for them several decades from now.

Having some cash "locked up" in this fashion will help. You don't even need to invest the money, to be safe.

Should a person become physically or mentally handicapped, they will also be able to withdraw their SRS savings penalty-free with a 50 per cent tax concession, regardless of age.

Even before you turn 62, there might be years when you will not be earning any income. For example, you might want to quit your job to look after the kids. This can happen when you are in your 30s or 40s.

In that case, if you have made SRS contributions from a marginal tax rate bracket of 7 per cent or more, the 5 per cent early withdrawal penalty will still make the scheme worth it as long as you do not incur any other income tax from withdrawal. This is the case if you withdraw just S$20,000 a year.

If you have no income, and have been contributing from a tax bracket of 7 per cent a year, you can arguably benefit even by withdrawing up to S$45,000 a year - where you have an effective income tax rate of 2 per cent on top of the 5 per cent penalty.

The higher your income tax bracket when you contribute, the more you can withdraw and still benefit despite the 5 per cent penalty.

Ultimately, the SRS is not an easy scheme to understand. But there are reasons even beyond the attractive tax benefits for Singaporeans to consider having some money in it.

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[valuebuddies]

Lately I have just came across with SRS and trying to understand it better in search of alternatives to invest/save for my retirement.

I have learned that the best part about SRS is to reduce one personal tax or to defer the tax payable after 62yo with possible lower tax rate. Having think carefully I find it not really beneficial to my case with the following reasons:

i) my tax bracket is not high, just started touching 11.5%
ii) ideally, I would like to have an investment property to fund my retirement, thus I am expecting to pay taxes even after 62yo, so 50% any withdrawal amount after 62yo might be still subject to tax
iii) I am expecting that 32 years later when I reach 62yo, more than 50% of my SRS fund will be the cumulative investment gains/incomes, and thus even with the 50% exemption on withdrawal sum, I might be still paying taxes on my investment gains/incomes (which is not the case if I invest outside from SRS)
iv) Uncertainty on the changes to personal tax rates 32 years later
v) Long lock-in period reduces flexibility of investing in non-SRS approved investments (eg. investment property etc)

For those who have SRS accounts, please share your thoughts on my findings above. Thanks...

[bran]

I had my own reservations about the SRS account in the past but i would strongly advocate it now after running through some numbers- due to the deferred tax nature and the taxation on only 50% of the total balance, it is advantageous to contribute to the SRS.
Of course, if you require immediate liquidity, example buying a house, or saving for emergency funds, etc you should plan for those first.
Anyway, for those who require a revision on the scheme. http://www.mof.gov.sg/Portals/0/MOF%20Fo...arised.pdf

Before i dive into the numbers, i would highlight one point- anyone and everyone, whether these numbers are right or not should set up a SRS account and contribute the first dollar in because at the very least, that will lock in your statutory retirement age. I quote from IRAS website, "Note 1 : You can withdraw your SRS monies over 10 years from the date of your first penalty-free withdrawal. Withdrawals are penalty-free only if they take place after the statutory retirement age that was prevailing at the time of your first SRS contribution. The statutory retirement age for all SRS members is currently at 62."
https://www.iras.gov.sg/irashome/page04.aspx?id=3346

Back to the numbers, I'll assume everyone knows the mechanics to the scheme, so i'll just jump straight to the sums. Lets work out the break-even sums to see at what level would you be better off investing on a post-tax basis.

Scenario 1, investing SRS monies-
Per year investing $10k, time period: 30 years, Return per year of 8%.
FV = 1,132,832.11. (BEFORE the final tax upon withdrawals- we have no idea on the exit tax yet, so lets discuss that in the next part)

Scenario 2, investing on a post-tax basis:- (ie. without contributing to SRS). Assuming your marginal tax rate is 15% (on average over your life). Then, to compare apple to apple, the investment amount per year will be less the marginal tax rate
Per year investing $8.5k ($10k * (1 - 0.15), time period: 30 years, return per year of 8% (Assuming you are investing in the same investment universe)
FV = $962,907.29

Wait, we are not done yet as we need to calculate the break-even exit tax rate where you are worse off when contributing to SRS.
The difference between scenario 1 and 2 is $169,924.82 (lets call this A)
Going back to scenario 1, the max taxable base is 50% of the total amount = $566,416.06. (lets call this B)
Therefore, A/B = 30%. Or in other words, the exit average tax rate for the withdrawal has to be in excess of 30% for you to be worse off when you contribute to SRS.
I use average as you will be withdrawing the entire amount. There is an off chance that this may occur as something untoward may happen to you at the brink of your retirement and the entire amount is deemed withdrawn immediately.

If you can plan your exit over the period of time, say the full 10 years, you will almost inevitably be lower than 30% and you will almost always be better off contributing to SRS.

You can try different assumptions for the returns, and marginal tax rate of your contribution, and you will realise that the relationship holds true, the average exit tax rate will have to be > 2x that of your current marginal tax rate for you to be worse off when contributing to the SRS account than when you are not. Thus, if your marginal tax rate is 11.5%, then the average tax rate upon your withdrawal has to be more than 23%, and even higher IF you are able to plan your exit. So 15% = 30% and 20% = 40% for instance. While i do believe the push for greater social spending may inevitably push up the marginal tax rates, I still find it hard to imagine that the average tax rate will be more than 30%. And anyway, this argument is circular as your own tax savings would increase as the tax rates go up in the latter years assuming that tax rates do go up, so you will be saving more tax dollars anyway when contributing to SRS. Thus, the breakeven tax rate would have to be even higher...

About the only grouse i can have left is that the SRS limits you to shares on the SGX only, so I would lobby strongly for SGX to introduce better-run ETFs and more globally representative ETFs to be listed on the SGX to broaden the SRS investment options. if SGX is reading this, could you please do something about it?

[valuebuddies]

Yes, I have oversight the compounding effect on the tax savings in SRS account. But having the primary objective as saving for retirement, I find 8% return a year too risky and too optimistic. I am merely looking at 3-5% with the sole intention to beat inflation, that's all.

Having work out some figures with the following criteria:

i) tax rate 11.5%
ii) annual return 3% (to 5%)
iii) annual contribution 10k
iv) 30 years tenors

The difference between the investing via SRS and investing with the same amount (net of tax) is merely $56,353.08 (to $80,224.91).

Whereas, the taxable income from one-time withdrawal of SRS at 30 years later is $245,013.39 (to $348,803.95).

You are absolutely right that the breakeven exit tax rate is exactly twice of my current tax rate

So let's calculate how much I can save with this 30 years lock-in scheme.

i) assuming that I have taxable income at the age of 62 (eg. rental) amounting to $30,000 (net $5,000x12 - shared with spouse),
ii) assuming that I manage to achieve a annualised 3% return from my SRS account,
iii) assuming that withdrawals are split into 10 equal yearly instalments,

The yearly taxable income would be $30,000 + ($245,013.39/10) = $54,501.34 which resulting tax payable (ignoring all tax relief) of $1,565.09.

Without the SRS withdrawal, the tax payable (ignoring all tax relief) would be $200.

So with SRS, I am actually paying additional $1,365.09 of taxes giving total of $13,650.90 for 10 years period (based on the present tax rate and scheme).

The actual savings would then be $56,353.08 - $13,650.90 = $42,702.18 over a period of 40 years, worth?

My opinion is that the savings is indeed "generous" provided that I am willing to lock my money for a 30-40 years period. But with the plan of investing mainly in non-SRS approved investment, I don't think I would be willing to keep few hundred thousands in the SRS accounts by the time of 62yo. Perhaps, I would start contributing in the year when I have higher tax bracket or in the absence of the tax rebates, it won't be the coming few years since my wife and I will be enjoying parenthood tax rebates now .