Supplementary Retirement Scheme (SRS) is a voluntary retirement scheme run by the government, and it complements the Central Provident Fund (CPF) (a compulsory savings scheme for Singapore Citizens and Singapore Permanent Residents). Unlike CPF, SRS is also available to foreigners who are above the age of 18 years old. Amounts contributed to SRS will be eligible for tax relief and it can be used to invest in certain products. Returns from investments are tax-free and upon reaching your retirement age, only 50% of the withdrawals are taxable.
Contributions to SRS must be made in cash, with a maximum annual contribution of $15,300 for Singapore Citizens and Singapore Permanent Residents, and $35,700 for foreigners. This prevents individuals from misusing SRS to increase their tax relief amount.
Additionally, contributions made do not need to be filed as this will be automatically processed and computed.
Pros and cons
An advantage of contributing to SRS is that you will be able to enjoy dollar-for-dollar tax relief, capped at $80,000 of personal income tax relief. Contributions made in the current year will only be eligible for tax relief in the following year. You can calculate your tax liability and tax relief using the IRAS calculator here.
However, if you make any withdrawals before the retirement age, the amount withdrawn will be subjected to tax and a 5% penalty. When you make withdrawals after reaching the retirement age, the tax concession will only be at 50%.
Another downside of SRS is its low interest rate of 0.05% per annum. In order to maximise the amount in SRS, it is advisable to invest in a few products via SRS to enjoy a higher return.
What you can invest in using SRS
There are a few government-approved products which you can invest in using the amount in SRS. The returns from these investments are tax-free and the chances of it giving a return of more than 0.05% is high (though it is not entirely risk-free).
1. Fixed deposits
Interest rates of fixed deposits from the three banks starts from 0.05% per annum. As long as you place a deposit of $1,000 to $19,999 with DBS for at least 3 months, you will be earning an interest of 0.15% on the amount. This is considered to be the safest investment choice among all options as it is protected by the Singapore Deposit Insurance Corporation (SDIC). Banks are also under the obligation to return you the full principal amount upon maturity.
Unlike fixed deposits, the returns on structured deposits depend on the performance of the bank’s choice of financial instrument. It is essentially a mixture of fixed deposits and investment products such as shares, market indices, bonds, and foreign exchange rates. An important point to note is that structured deposits are not protected by SDIC.
Individuals who invest in structured deposits can enjoy a diverse investment with a higher potential gain. The full principal amount will be received upon maturity if the institution which you have chosen remains debt-free. For individuals who choose to withdraw their structured deposits before the maturity date, you may not receive 100% of your principal.
3. Singapore Government Securities
Singapore Government Securities (SGS) are investments which are fully backed by the Government. It includes Treasury Bills (T-Bills), Singapore Savings Bonds (SSB), and SGS Bonds. The returns on SGS are exempted from tax as there is no tax on capital gains in Singapore.
1. Exchange Traded Funds
Similar to the Straits Times Index (STI), Exchange Traded Funds (ETFs) comprises of the top 30 companies listed on the Singapore Exchange. This is beneficial for individuals who want to invest in a range of stocks in the market instead of solely investing in a company. What makes ETFs different from STI is that ETF is a replica of STI which tracks the index closely. As such, this brings about a tracking error when one price of the 30 stocks in STI changes drastically.
Individuals can invest in ETFs using the respective institutions investment plans. For instance, OCBC offers a Blue Chip Investment Plan which allows investments to be made using SRS funds, from $100 a month.
2. Unit trusts
Unit trusts are funds which pool investment amounts from various investors to invest in bonds and equities. The returns are based on macroeconomic trends and the gains on such investments will be credited to the SRS account directly.
Individuals can start investing in unit trusts from $100 monthly or a lump sum of $1,000 across the three banks. This is a great choice for individuals who wish to have their funds managed by a professional and yet, be able to invest in a diversified range to spread the investment risks.
3. Endowment Insurance Plans
Endowment insurance plans are savings plans with insurance coverage against total permanent disability and death. These insurance plans do not cover critical illnesses and other health issues. Funds in SRS can only be used to purchase 5 year prepayment endowment plans.
Starting a Supplementary Retirement Scheme account is a way to set aside some funds for your retirement while enjoying tax breaks. Despite that said, it is important to only invest the amount which you will not be using till the retirement age as early withdrawals will incur a 5% penalty and 100% tax.
*Link to the tax relief article from the previous month.