Monday, 7 November 2016

Take Advantage of Supplementary Retirement Scheme (SRS) Account (Part One)


The main purpose of SRS is to supplement our retirement income, quite obvious from its name. Here is a quick summary of the features for those who have not heard of the SRS. You can make contributions to your SRS annually (up to $15,300 for Singaporeans and $35,700 for foreigners) and when you withdraw them at statutory retirement age (currently 62), only 50% of the withdrawn amount is subject to tax. Do you know how else you could take advantage of the SRS account to build your portfolio? 


Everyone loves to maximize the returns on their money with the highest possible returns. However, a sound financial plan will have to include risk-averse assets to weather economic downturns. Is there any way the SRS account could help us achieve that? In this post, we explore the use of SRS account for investing in risk averse assets. 

Tax Savings as CASHBACK !


Source: www.ocbc.com
As illustrated, money contributed to your SRS accounts reduce taxable income. When you decide to contribute to the SRS, essentially you are receiving a "cashback" through tax savings from the government, who doesn't love a little cashback? We ran a few case studies to determine the returns based on amount of taxable income. 

Case 1: Fresh graduate with $25,000 annual taxable income. 

With $25,000 of taxable income, you will receive a 2% returns from your contribution up to a maximum of $5,000. Of course, you could contribute more than $5,000, but you would not receive any tax savings as chargeable income below $20,000 is not taxable. The example is illustrated with an annual earned income of $36,000 (approx $2500- $3000 per month + 13th month bonus) and personal relief including CPF contributions and etc. 

Source: www.ocbc.com

Case 2: Mid career professional with $60,000 annual taxable income.

With $60,000 of taxable income, you will receive a 7% returns from your contribution up to a maximum of $15,300 for Singaporean. The example is illustrated with an annual earned income of $80,000 (approx $6000-6500 per month + 13th month bonus) and personal relief including CPF contributions and etc. 

Source: www.ocbc.com



Case 3: High level executive with $110,000 annual taxable income.

With $110,000 of taxable income, you will receive a 11.5% returns from your contribution up to a maximum of $15,300 for Singaporean. The example is illustrated with an annual earned income of $150,000 (approx $10,000-12,000 per month + 13th month bonus) and personal relief including CPF contributions and etc. 

Source: www.ocbc.com
As per the 3 scenarios, the higher your taxable income, the higher the returns from SRS contributions. The returns on the contribution might not the net amount you gain as there is a 5% penalty fee imposed on early withdrawal. Further, 50% of the sum withdrawn will still be taxed after statutory retirement age at prevailing tax rate.

Considering that you will not be withdrawing funds from your SRS earlier than the statutory retirement age, the SRS is one of the best "cashback" mechanism around for $15,300 per year in return for some loss of liquidity. The funds in your SRS account could be used to purchase insurance, equities or bonds. Therefore, for those who are buy-and-hold investors who are already investing approximately $15,000 per year into these financial products, it will feel like paying for them from another bank account.

Even for those that value liquidity and cash on hand, a 5% penalty is not too hefty amount to pay for an early withdrawal (especially after you have gained a cashback more than 7% annually). Further, you could easily get a 2% compounded interest for your contributions if you purchase investment grade bonds such as the SGS bonds.

In the next post (part two), we will look into the possible penalties for early SRS withdrawals. If you like to open your SRS account or find out more, you could visit IRAS SRS webpage for more information on what is required.

Best,
AT

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