Why SRS accounts are a good way to save

Dec 19, 2010
small change
Why SRS accounts are a good way to save
While some dispute benefits of supplementary retirement scheme, it's possible to enjoy good return on investments
By Goh Eng Yeow, Senior Correspondent

Around this time of the year as the annual bonus payout approaches, I find myself promoting a little-known savings programme known as the supplementary retirement scheme (SRS).

This is a scheme established in 2001 to complement the Central Provident Fund (CPF), which allows a saver to put up to $11,475 a year into a special account that can be opened at DBS Bank, OCBC Bank or United Overseas Bank and enjoy a tax relief on his contribution.

As Singaporeans live longer and healthier lives, relying solely on their CPF to keep them comfortably retired during their golden years may not be sufficient, especially if a big chunk of it is used to service monthly housing instalments.

What SRS offers as an incentive to savers is the tax savings they get from the money they put away into an SRS account.

Let me explain.

If you have a taxable income of $100,000 and you put away $10,000 into your SRS account, you can enjoy savings of $1,400 on your income tax bill the following year.

It is a tidy sum not to sneeze at, especially if you have the discipline to keep squirrelling away the same sum into your SRS account every year.

After 10 years, you will reap considerable savings of $14,000 on your income tax and that is not including any interest or investment returns which you might have earned from those savings.

After reaching the mandatory retirement age - now fixed at 62 - you can withdraw up to $40,000 tax-free from your SRS a year.

This works out to a maximum tax-free sum of $400,000, as SRS withdrawals can be staggered over a period of 10 years after retirement.

Data furnished by the Government shows that the effort to popularise the SRS is slowly bearing fruit.

Between 2007 and last year, the number of SRS account holders jumped by 12,322 - or 30 per cent - to 53,656, as more Singaporeans learnt about the scheme and decided to sign up.

This is a significant improvement over earlier years when the number of account openings languished at a sluggish pace.

Still, this number is a far cry from the 400,000-odd taxpayers, earning more than $60,000 a year, and who may reap some tax savings by putting some money into an SRS account.

When a saver squirrels away some money into an SRS account, he does not need to keep it locked up in a cash deposit. He can use the money in the SRS account to buy unit trusts, insurance policies or even stocks listed on the Singapore Exchange.

But the few times I had written to raise public awareness of the SRS, I received feedback from a few disgruntled readers who disputed the benefits it bestowed on the ordinary saver.

One reader noted that there was a 5 per cent penalty charge for early withdrawal. The sum withdrawn would also be treated as part of his taxable income for that year.

Doesn't this smack of a disguised capital gains tax, he asked.

There was another reader who griped that the SRS was useless for savers who were not interested in buying financial products from banks.

'If you already plan to buy things like unit trusts from that pretty girl in the bank, you can consider putting money into SRS, enjoy some tax savings and make her very happy for closing the sale and getting a commission out of it,' he wrote.

A third reader raised the intriguing possibility that a successful investor may actually end up footing an even bigger tax bill on the monies he withdraws from his SRS account after retirement.

While not disputing the merits of the points they raised, I can use only my experience as an SRS account-holder to point out some of the benefits.

I have been diligently putting money into my SRS account every year since its inception.

Going through the SRS data furnished by the Government, this decision is hardly surprising. I belong to the age group, between 36 and 55 years, which form 70 per cent of all SRS contributors.

In general, wage-earners in this age group would have a steady job and a steady income, with some cash to spare - after servicing their home mortgages and car loans.

After 10 years, I can attest to the considerable sum I reaped on the tax savings I enjoyed from the SRS contributions.

The incremental benefits add up. The total tax savings that I received over the past decade were sufficient for me to make the maximum SRS contribution of $11,475 for this year - and still have cash left over.

And unlike some SRS account holders who complain that they are lured into buying unsuitable insurance policies or financial products, I am glad to report that my experience has, so far, been a happy one.

In my 10 years of putting money into my SRS account, I have never once been pursued by an insurance agent or financial adviser on how to invest the funds.

Partly, this is because I know how I want to invest the money. That is surely the maxim which any investor should apply on all his investments, and not simply those related to SRS.

As I have no intention of making any premature withdrawal from my SRS account prior to retirement and attracting the 5 per cent penalty charge, I can afford to take a long-term view on selecting the investments. This has served me well.

My SRS account now has a couple of blue chips that were accumulated when they fell to attractive levels during the 2003 Sars crisis and the more recent global financial crisis two years ago.

I am also perfectly happy to keep the SRS contributions parked in cash in some years when I could not find any stocks worth my while to invest in.

Despite the market upheavals over the years, I have enjoyed an annual return of 12 per cent on my SRS investments. All in, my SRS account has outperformed the benchmark Straits Times Index in the past decade.

But unless I enjoy an extraordinary stroke of good luck in my investments, it is unlikely that I would ever hit the $400,000 tax-free savings ceiling limit for the SRS account by the time I retire.

I believe that this is an experience which most SRS savers are likely to share, since they keep their SRS monies in ultra-safe investments like blue chips, bonds and insurance products.

For us, the benefits in having an SRS account are obvious.

What is needed is for the scheme to be given a makeover like a catchy name change to attract more savers to its fold.

engyeow@sph.com.sg
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Good investments

Despite the market upheavals over the years, I have enjoyed an annual return of 12 per cent on my SRS investments. All in, my SRS account has outperformed the benchmark Straits Times Index in the past decade.

Is SRS worth considering? I was looking at it 2-3 years back but am not quite convinced. With about 10 days left to go, should I move $11k of my cash into SRS?

I think my tax rate is in the 3rd bracket, ~3% maybe? Saving $330 from tax but lock up that $11k until retirement.

If I withdraw prematurely, there's a 5% charge slapped on it. Unless my tax rate is above that, I better not think about withdrawing it otherwise I pay more to the gov in the end. This seems to favour the rich. If I am liable to pay more than 5% tax, then I put my cash into SRS. After I get the rebate, I just draw the %11k out and pay 5% fees, saving the tax differential.

Any comments?

Besides the 5% penalty, the amount withdrawn will also be treated as income which is taxable at your marginal tax rate - so you pay more than 5% for early withdrawal.

I do not agree with Goh EY that it is that difficult to hit $400,000 level. Taking $11,475 compounded at say 5% return for 20 yrs (assume start contribution from 42 to 62 yrs old) is already $379,431 so it is very possible that the $400,000 can be hit by starting earlier, or achieving higher return than 5%. The good news is that even if the total return top $800,000 at the time of withdrawal and taxed at the current 5.5%, there will still be good tax money saved.

SRS is good for those high annual income with (much) more than 5% tax bracket, and have "extra" money. So even if one choose to early withdrawal and incur 5% penalty, he still benefit the differences. This is assuming he is not earning a lot taxable income on that year or in semi retirement.

If tax less than 5%, meaning taxable income of less than 30K (which is not a lot), better to keep any extra cash as reserved.

Do note that penalty free withdrawal age is at the prevailing retirement age, and its likely to increase in near future. so make sure you have other source of cash income to ta-han until can touch the SRS money, of course unless you wish to continue work.

I remember d.o.g. having an excellent post on this in the Afralug forum which I unfortunately did not copy down. Anybody saved his words of wisdom?

Courtest of d.o.g.

11-15-2009, 09:40 PM
SRS Scheme - Savings scheme that few know of
The fundamental flaw of SRS is the contribution cap of $11,475 per year for locals. What this means is that there is a limit to the actual benefit you can obtain from SRS.

Run the numbers and it becomes clear that even at the maximum practical contribution ($11,475 annually for 20 years) the benefits are minimal.

Cash: $11,475
Tax: 20%
Net: $9,180
Period: 20 yrs
Total: $183,600

SRS: $11,475
Net: $11,475
Period: 20 yrs
Total: $229,500

Now we need to assume a rate of return. Let's be hopelessly optimistic and assume 9% p.a. for both, which would mean the person in question is a competent investor, able to beat the market over 20 years. After 20 years we get:

Cash: $469,650
SRS: $587,062

So SRS comes out ahead. We have 10 years of withdrawals so annual withdrawal:

Cash: $46,965
SRS: $58,706

SRS is taxable after a 50% discount, so the taxable amount is:

SRS taxable amount: $29,353
First $20,000 not taxed
Taxed on: $9,353
Tax Rate: 3.5%
Tax Paid: $327
Net: $58,379

Even after paying taxes, SRS is ahead by $11,400 per year. So far, SRS looks good. But consider this:

If you earn enough to be in the 20% tax bracket from age 42 to 62, your annual income has to exceed $320,000 for 20 years i.e. you would earn a minimum of $6.4m. With this kind of income, in retirement, is $11,400 per year (the net difference between cash and SRS) going to make a real difference? If it does, you have severe problems with money management, and SRS is not going to save you.

The maximum difference assuming both high income and capable investment is $117,412, which amounts to less than 2% of total income earned over 20 years. In other words, if you save 2% more of your income you can get all the SRS difference without the hassle of a lockup period.

If we are more realistic and assume lower rates of return e.g. 5% the difference is vastly smaller, and trivial to make up via a slightly higher savings rate. And we are also making the false assumption that cash and SRS returns are the same, when in fact they are not e.g. cash can be used to buy property, SRS cannot. So it would be realistic to assume a small advantage for cash returns, perhaps 1% per year. If the difference is 2% per year, then over 20 years, cash matches SRS.

So we have established that SRS is basically useless if your taxes are high, because it also means your income is high enough that how you save makes more difference than whether you use SRS. And if you are a savvy investor, your cash will earn much more than your SRS money.

How about the low income people? Well, if you are earning less than $40,000 a year, $11,475 is over 25% of your income. This is an insane way to save for retirement since (a) the tax savings are much less and (b) you pay a penalty if there is an emergency that needs the money.

What about the middle-upper income? Let's say you earn $80,000 per year. $11,475 is still about 15% of your income, not a small amount. Yet the tax rate is only 14% so the savings are less. At a 9% return the numbers work out to $7,900 per year in favour of SRS, again, not a meaningful difference. With more realistic rates of return, the SRS advantage erodes further.

The ONE case where SRS could have some use is when you are both (a) high income and (b) near age 62. In this case SRS could serve as "free money" because the tax savings, while small, are real, and near age 62 the opportunity cost of locked-up money is lower.

Suppose you are 57, and earning $320,000 a year. With SRS you could put aside $11,475 per year, total $57,375, against $49,343 for cash. This gives total savings of $8,000 - but you have to wait 5 years to get it. But of course, while $8,000 is real money, if you earn $320,000 a year then $8,000 is basically 1.5 weeks' work. So that brings us back to the same conclusion - SRS is a waste of time.

(19-12-2010, 10:08 PM)aspeed Wrote: Do note that penalty free withdrawal age is at the prevailing retirement age, and its likely to increase in near future.

The statutory retirement age is locked in at the time of first contribution, any future increase in retirement age will not affect existing account holders who have already made their first contribution.

Quite true.
Most people never take into account the time value of money when making their investment decisions.

Don't understand d.o.g's words of wisdom. Sounds deep. Can't get the numbers. Only get the general idea that SRS only has limited upside and for those who can use the upside, it's merely icing on the cake and is rather pointless since once at that point, you can either make better use of the money or the savings is negligible. Is this right?

Not sure if I'm reading correctly, but $80k income the tax rate is 5.375% not 14% (4300/80000). Only excess of $80k are taxed at 14%. So $80-160k is subjected to effective tax between 5.375% to 9.6875%. If you make $320k then you still get taxed 13.3% "only". The maximum tax rate is near 20% (the first $320k is lower than 20% and hence total effective tax will never hit 20% even when income is infinity).

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Thanks to d.o.g for detailed analysis and calculation. But guess one can always contirbute just enough (no need to contribute max for every year) and target to have $400K (incl any invest gains) in SRS by retirement age. Although the tax saving may not be very much, but the feeling of tax free is great.

Other benefit of SRS is it is a form of force saving. Also not sure the rest, my share portfolio in SRS account fare much better than cash account, as my SRS have a different time horizon.

(19-12-2010, 11:06 PM)Blackjack Wrote: The statutory retirement age is locked in at the time of first contribution, any future increase in retirement age will not affect existing account holders who have already made their first contribution.

There is no lock in of the retirement age, pls go check.

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(20-12-2010, 03:42 AM)bb88 Wrote: Not sure if I'm reading correctly, but $80k income the tax rate is 5.375% not 14% (4300/80000). Only excess of $80k are taxed at 14%. So $80-160k is subjected to effective tax between 5.375% to 9.6875%. If you make $320k then you still get taxed 13.3% "only". The maximum tax rate is near 20%

You should not average the number in a tax calc, as tax bracket is different at different income level.
Assuming your taxable income is 90K. The first 80K is $4300, next 10K is tax at 14% (which is $1400). if you contribute to SRS (or claim any other tax relief) the $10K, you save the extra $1400 tax, which is 14%.