Why SRS accounts are a good way to save

[Caelitus]

All charges are waived since start of SRS till now. Who knows when they will start charging. But would be interesting to know how are they going to deduct charges if all available fund in SRS are invested. deduct from saving account or compounded till withdrawal age?

Based on the link I got from DBS (http://www.dbs.com.sg/Resources/personal...harges.pdf), only SRS account maintenance charges are waived. The rest applies.

According to para 12, 13 and 14 of T&C for DBS SRS, they can charge you interest, consolidate all or any of your accounts. The fees are to be debited from SRS account unless DBS and the Regulations permit and require otherwise.

[bwessel]

Forgive me as I am very new to investing. Just a teacher looking for some options upon my relocation to Singapore. My question on this post is this. Maybe I am reading it wrong. Isn't the only portion of the money that is taxable in the end the initial contribution? I thought all gains from this 20 years of investing was tax-free. Would that not change the calculations? Just trying to sort the numbers.


The figures below are showing 50% of the total investment (including gains) taxed. Would it not be 50% of only the initial contribution that is taxed? 100% of all gains untaxed?

Thanks
Beth

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.

[yeokiwi]

Forgive me as I am very new to investing. Just a teacher looking for some options upon my relocation to Singapore. My question on this post is this. Maybe I am reading it wrong. Isn't the only portion of the money that is taxable in the end the initial contribution? I thought all gains from this 20 years of investing was tax-free. Would that not change the calculations? Just trying to sort the numbers.

The figures below are showing 50% of the total investment (including gains) taxed. Would it not be 50% of only the initial contribution that is taxed? 100% of all gains untaxed?

Thanks
Beth

According to the official document from Ministry of finance, all the money(gain+contributions) in the SRS account will be subjected to tax.
http://app.mof.gov.sg/data/cmsresource/s...8Feb11.doc


Withdrawals from SRS accounts are subject to tax in the Year of Assessment following the year of withdrawal.

For example, if you withdraw $6,000 from your SRS account in 2009, either 50% or 100% of the withdrawal amount, depending on the type of withdrawal (see below), will be regarded as part of your income in 2009 and subject to tax for Year of Assessment 2010.

50% of the sum withdrawn will taxed for the following types of withdrawal:

a. withdrawal on or after the statutory retirement age prevailing at the time of your first contribution (prescribed retirement age);

b. withdrawal on medical grounds;

c. withdrawal on death; and

d. withdrawal by a foreigner who has maintained his SRS account for at least 10 years from the date of his first contribution.

100% of the sum withdrawn will be deemed as your income and taxed in all other situations.

If you are a non-Singaporean who no longer works and lives in Singapore, you will be taxed as a non-resident when you withdraw the fund from your SRS account.

[CY09]

Just curious, isn't the SRS account bad especially for young savers who wish to use the account to purchase shares by adopting a "Buy and hold" strategy? This is because there is a quarterly charge for buying shares as well as extra charges for buying through a SRS bank (e.g $2 for every lot)? This is quite tough for me personally especially when many of my "value" shares purchased tend to be priced below $1, thus I will be incurring the max $25 fee often on top of brokerage charges.

[d.o.g.]

Just curious, isn't the SRS account bad especially for young savers who wish to use the account to purchase shares by adopting a "Buy and hold" strategy? This is because there is a quarterly charge for buying shares as well as extra charges for buying through a SRS bank (e.g $2 for every lot)? This is quite tough for me personally especially when many of my "value" shares purchased tend to be priced below $1, thus I will be incurring the max $25 fee often on top of brokerage charges.

As I noted in my original post so kindly quoted by yeokiwi, the fundamental problems with SRS go deeper than any administrative charges the banks levy. You just can't save enough on taxes for the hassle to be worth it.

SRS is broken, don't use it unless you are in that specific group of high income earners who are very near retirement. Even then, as the worked examples show, all you need to do is save 2% more of your income, and you have already overcome the supposed tax advantage of SRS.

[opmi]

if u are very good at investing, SRS is a lousy deal. Coz you are sharing 50% of your capital gains compounded at higher rate, with Govt. Which may be many times more than the tax saved compounded. Dividends received in SRS also taxed at capital gain in the future.

[flinger]

Hi CY09,

I don't know which bank you are using, but as far as I know there is no quarterly charge for buying shares and don't know what it means by buying through the bank, but I have not paid a single cent more than the brokerage charges.

Just curious, isn't the SRS account bad especially for young savers who wish to use the account to purchase shares by adopting a "Buy and hold" strategy? This is because there is a quarterly charge for buying shares as well as extra charges for buying through a SRS bank (e.g $2 for every lot)? This is quite tough for me personally especially when many of my "value" shares purchased tend to be priced below $1, thus I will be incurring the max $25 fee often on top of brokerage charges.

[tanjm]

I agree that SRS is not for everybody. However, the financial advantage is still very real albeit not large unless you have high tax rates (and a comcomittent income).

D.O.G says the small advantage is not worth the hassle. I disagree there's much hassle. Just throw in the money and buy a ETF or mutual fund - that's appropriate for busy high earners who don't want to do investing homework. He also mentions that you just have to save a little more and the advantage will negate - that's rather irrelevant in a like for like comparison esp since I can save that extra regardless of SRS.

I do understand that most of the people in this forum have a high opinion of their investing skills and perhaps SRS is not for them 8-)

Btw even if you have a high balance on retirement, you can buy an annuity and escape the 10 year withdrawal rule.

[tanjm]

A more realistic scenario in my opinion (for a fair number of working professionals) might be that
1. you have a sufficiently high income in the last 10 years of your professional life (as a salaried, somewhat high income employee)
2. The max investment you can make is 12,750 per year.
3. Your tax rate is 15%.
4. Any amount you put in is immediately used to buy a STI ETF (assume 7% including dividends).

Then the advantage is $346K in SRS versus $294K in cash account. You withdraw $34.6K per annum, below the tax threshold, $5.2K per annum difference : enough for a nice regional holiday perhaps. Or you invest in an annuity to give you about 2.5k per month (depending on the investment climate at the time) : even more chance to escape the tax man, if you consider your other income sources (if any).

Like I said, small but discernable. Good for a salaried professional in a management job or similar (>$120K per annum salary, probably in his 40s or 50s). In this day and age, not that uncommon.

[fat al]

Btw even if you have a high balance on retirement, you can buy an annuity and escape the 10 year withdrawal rule.

Take note of the death contingency before retirement. I am not sure if the law requires mandatory withdrawal and even if not, the estate administrator/trustee/beneficiaries may take this course before one gets to implement annuity program. Immediate withdrawal, although enjoying 50% waiver, may be subjected to higher taxes as a lumpsum.

That said, given that current marginal tax is
up to 320k: 42,350 (13.23%) @50% = 6.62% for SRS withdrawal
beyond 320k: (20%) @50% = 10% for SRS withdrawal

SRS may still be useful if one's current marginal tax rate is higher than above.