Income tax in Singapore can reach up to 22% on highest income bracket. To reduce income tax, Singapore government offers possibility to deduct retirement savings from chargeable income through the Supplementary Retirement Scheme (SRS) for Supplementary Retirement Scheme (SRS) tax relief in addition to CPF savings, the Supplementary Retirement Scheme (SRS) is a voluntary program that encourages people to save for retirement. The tax benefits of contributions to SRS are available. Before withdrawal, investment gains are tax-free, and only 50% of SRS withdrawals at retirement are taxed.
What is the Supplementary Retirement Scheme (SRS)?
The Supplementary Retirement Scheme (SRS) is a scheme started by the Singapore government that prepares you for retirement. Participation in SRS is voluntary, unlike the CPF scheme. Using the right way, SRS can be an effective tax relief tool while saving up for your retirement.
So how does SRS differ from CPF? Well, CPF only provides you a very basic retirement income, which might not be enough to sustain the lifestyle that you want and make the most of your golden years. Furthermore, many are using their CPF to buy homes, which will decrease your CPF payout during retirement.
How much can you save on tax reliefs?
One of the most notable benefits of having an SRS account is tax reliefs. You can make an SRS contribution to top up your SRS account as many times a year as you like, up to a maximum of S$15,300 for Singaporean citizens/PRs, and S$35,700 for foreigners. Here’s a simplified example of how SRS can help you achieve substantial tax savings:
|Less Personal Reliefs||$31,500|
|Without SRS||With SRS|
|Potential Tax Savings||$1,071 (40%)|
Don’t stop at just opening an SRS account
Money in your SRS account earns a mere 0.05% interest per annum. With an inflation rate of approximately 2%, idle money in your SRS account will erode over time. Make your SRS contributions work harder by investing it in instruments such as life insurance. Life insurance products are available through your bank but better go through independent financial advisors to have accessed to more options.
What’s more, your investment returns are credited directly to your SRS account where it can grow steadily and will be exempted from any income tax.
So what’s the catch?
The biggest cons of SRS account is that if you make any withdrawals before the statutory retirement age (currently age 62), it will be subjected to a 5% penalty, plus 100% of the amount withdrawn will be taxable.
However, after you reach the statutory retirement age, you can choose to withdraw the monies either everything at one go or spread your withdrawals over 10 years. During this period, any amount withdrawn from your SRS account will enjoy a 50% tax concession.
Finally, there is a personal income tax relief cap of $80,000 for each Year of Assessment (including relief on SRS contributions).Therefore, do make an informed decision on the benefit of SRS contribution.
Various investments you can make
Your SRS account’s funds will only generate a 0.05% annual return. You can put these funds to work by investing in things like:
- Mutual and unit trust funds
- Market-Traded Funds (ETFs)
- Plans with a single premium (both annuity and non-annuity plans)
- a few types of life insurance
- A fixed deposit
Tips on how to maximize Supplementary Retirement Scheme (SRS) tax relief
1. Open your SRS account today and add S$1 to it.
Even though retirement may be far off, the year we contribute to our SRS account is important because it determines the year in which we can withdraw our SRS funds. Upon reaching the applicable statutory retirement age at the time you made your first SRS contribution, you may withdraw your SRS funds without incurring any penalties.
2. If you’ve heard that you should add $1 to your SRS account, here’s why:
The retirement age will rise from 62 to 63 in 2022 and then again to 65 by 2030, as was announced last year. This implies that if you wish to take your SRS funds at the age of 62, you must:
You should only consider taking money out of your SRS account after you reach the legal retirement age because early withdrawals are subject to a 5% penalty and are entirely taxed. Withdrawals made after reaching retirement age are subject to a 50% tax and can be made over a ten-year period.
The amount of tax you must pay with each withdrawal can be decreased (or even eliminated) by strategically planning and staggering your withdrawals over the course of ten years. There are no restrictions on the minimum or maximum withdrawal amount.
Additionally, you want to think about delaying withdrawals till you’ve retired and given up working. The first S$20,000 of your annual income is tax-exempt if you do not have any other sources of taxable income. If you withdraw S$40,000 in the ideal situation,
3. Choose investments that compliment your profile and portfolio
The investments you make will affect the returns on your SRS. You might reassess your investment portfolio before investing your SRS cash to determine which investment gaps your SRS might cover.
For instance, if your SRS funds are being used for a retirement annuity plan, you could opt to use your available cash to invest in stocks in order to diversify your holdings. This would ultimately come down to your investment objectives and risk tolerance.
Your SRS funds’ investing options are more limited than those for cash.
To take advantage of SRS tax relief for the coming year, you need to transfer the money before December 31st, so take note and reduce your income tax. If you want to know more about SRS accounts and how to optimise your savings, please contact us.