Why SRS accounts are a good way to save

(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% (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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Should look at the top marginal tax rate, not ETR.

I suppose the gist of d.o.g.'s article was that the effectiveness of SRS is limited for retirement needs.

For high income earner, the money saved is not signficant as compared to the overall income.
For low income earner, the money contributed is too large in proportion to their annual income such that the contribution may impact the sudden need of cash at the later stage of life.

(20-12-2010, 08:11 AM)aspeed Wrote:

(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.

The info is provided for all at IRAS. I have provided the link below.
Where did you get your understanding?
http://iras.gov.sg/irasHome/page04.aspx?id=1170

How we determine withdrawal period
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.

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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% (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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Hi, your understanding is correct.

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From what I gather so far:

Bad
- Funds locked in until retirement
- Locked in funds do not enjoy any interest (need to invest to grow otherwise subjected to time-value depreciation)
- Limited investment options of SRS funds
- Monetary benefit is marginal in many cases and may not make sense to therefore have the funds locked in for so long
- Exchanging liquidity/cash flow for lowering immediate tax may be counter-effective (losing $11k vs say $1.4k)
- Penalty for early withdrawal which may result in more losses

Good
- Tax deferment, possibly tax reduction (or zero tax) if post-retirement withdrawal is low
- Forced savings towards retirement
- Forced disciplined investment of SRS funds
- Forced diversification of investment portfolio (SRS is "safer" and long-term)
- Casual investment is likely to yield at least slightly better returns

Any more to add?

I think unless you're 100% certain you'll never consider SRS or SRS policy would never be enhanced to be better (2008 had a revision), I think everyone should "play safe" by opening an SRS account and then contributing at least $1 into it since by doing so, we have locked in the current 62 as the penalty free retirement age. We all know that it will eventually go up to 67, just a matter of time before it goes into legislation.

(20-12-2010, 09:39 AM)Blackjack Wrote: The info is provided for all at IRAS. I have provided the link below.
Where did you get your understanding?
http://iras.gov.sg/irasHome/page04.aspx?id=1170

ops, you are right. Thanks for correcting.

Previously it was "They can withdraw their SRS monies over 10 years from the prevailing statutory retirement age." but in 2008 they change the wording to "that was prevailing at the time of the first contribution."

http://app.mof.gov.sg/data/cmsresource/S...202008.pdf

(20-12-2010, 10:04 AM)aspeed Wrote: ops, you are right. Thanks for correcting.

Previously it was "They can withdraw their SRS monies over 10 years from the prevailing statutory retirement age." but in 2008 they change the wording to "that was prevailing at the time of the first contribution."

http://app.mof.gov.sg/data/cmsresource/S...202008.pdf

No prob. And this was an important revision as the pain of locking up the funds was a major bugbear for prospective account holders. The revision would alleviate this uncertainty. (esp since we may end up expiring instead of retiring if the statutory retirement age keeps going up with the current trend)

bb88 - Nice summary you have consolidated anyway. The $1 contribution is indeed a way to lock in the age, though sooner or later one will have to take sides. I think whether SRS is good, it really depends on the respective styles of money management individually. For the unitiated in financial matters, one could also do a top up to SA to enjoy the 4% automatically assuming the same constraint of funds being locked up. In such cases then probably its better not to put into SRS, esp if the effective tax reduction adds up to less than that.

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Another thing that comes to my mind which I thought may be useful for those bordering on indecision. If you look at the the income tax rate from 2003 till date, it has been reducing quite stably. If this continues one would be taxed even less upon reaching withdrawal age. Of course, this is premised upon the trend continuing. It gets even more interesting if you factor in the future value of money, where a rational person should logically choose to be taxed in the future rather than now, given an exactly same tax rate on the same amount of money.

Of course, if income tax rate spikes instead, that is the unsaid risk that will inevitably have to be taken. I'm guessing, if that happens, something extraordinary may have happened to Singapore?

(20-12-2010, 10:45 AM)Blackjack Wrote: For the unitiated in financial matters, one could also do a top up to SA to enjoy the 4% automatically assuming the same constraint of funds being locked up. In such cases then probably its better not to put into SRS, esp if the effective tax reduction adds up to less than that.

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Another thing that comes to my mind which I thought may be useful for those bordering on indecision. If you look at the the income tax rate from 2003 till date, it has been reducing quite stably. If this continues one would be taxed even less upon reaching withdrawal age. Of course, this is premised upon the trend continuing. It gets even more interesting if you factor in the future value of money, where a rational person should logically choose to be taxed in the future rather than now, given an exactly same tax rate on the same amount of money.

Of course, if income tax rate spikes instead, that is the unsaid risk that will inevitably have to be taken. I'm guessing, if that happens, something extraordinary may have happened to Singapore?

Can we top up SA? There is a maximum contribution to CPF right? I think for those with maximum CPF contribution $76k, it would not be possible to top up the SA?

Anyway, CPF release is even worse than SRS. The disbursement is totally at the discretion of CPFB. At least for SRS we can decide how much to draw and when to draw, subjected to maximum of 10yrs complete withdrawal from the first penalty-free withdrawal.

Actually I am not sure how much lower can the income tax rate fall. I think compared to many countries, our income tax rate is "quite low". The gov needs funding and our ministers salary is only ever increasing. Instead of basic infrastructure projects we are now putting money into stellar projects that puts the SG brand out to the world. This is much costlier and require more funds. How to supplement the income tax cut?

And I think income tax cuts would only affect the top earners. Unless we are in the >$320k bracket, the effect is minimal if any at all. Nonetheless, I think the rates will not go lower than 15% which is the current corporate rate. 18% may be more realistic. I suspect an announcement would be made before the election to lower tax rates for the top earners.

My understanding is that both a cash or OA topup to SA is possible. Comparing the case of using cash, there is a topping-up limit, defined as:

Prevailing Minimum Sum - {Ordinary Account savings + Special Account savings + Amount withdrawn from Ordinary and Special Accounts under CPF Investment Scheme}

The prevailing Minimum Sum is $123k, and will be raised yearly, so lots of headroom for a top-up.

I agree with you that the lock-in of CPF is more onerous compared to SRS. It is for this reason I did not choose to top up SA, though there's a "guaranteed 4% returns".

Agreed on your subsequent point on relative rate as well. Though I think there are many other ways the government can choose to tax us. So on the surface our income tax rate may seem low by global standards.

(20-12-2010, 09:56 AM)bb88 Wrote: From what I gather so far:

Bad
- Funds locked in until retirement
- Locked in funds do not enjoy any interest (need to invest to grow otherwise subjected to time-value depreciation)
- Limited investment options of SRS funds
- Monetary benefit is marginal in many cases and may not make sense to therefore have the funds locked in for so long
- Exchanging liquidity/cash flow for lowering immediate tax may be counter-effective (losing $11k vs say $1.4k)
- Penalty for early withdrawal which may result in more losses

The limitation in SRS is a very serious disincentive. Let me give you a real life example.

Say you have $11,475 in SRS and it is fully invested in Company A. Now, Company A does a rights issue (which happens to many a STI index companies during the recent crisis), with a very huge discount to last traded price. You are stuck because you have max out the contribution for that year, and you may not have enough $ to subscribe for your rights share entitlement. You will need to sell some shares to raise fund within the SRS to subscribe for your rights entitlement. Depending on the actual scenario, your share holding will likely be diluted.

I never know such a replacement forum existed till today. So I rejoined, same pseudonym.

I used to save in SRS. Now I don't anymore. The sums do not matter anymore. Because the statutory retirement age is a MOVING TARGET UPWARDS. What is the point of throwing $ into a black hole just like CPF, when they keep adjusting the retirement age?

(20-12-2010, 09:29 AM)yeokiwi Wrote: I suppose the gist of d.o.g.'s article was that the effectiveness of SRS is limited for retirement needs.

For high income earner, the money saved is not signficant as compared to the overall income.

For low income earner, the money contributed is too large in proportion to their annual income such that the contribution may impact the sudden need of cash at the later stage of life.