In this article, we explore investing with the Supplementary Retirement Scheme (SRS) in Singapore. Except being an initiative by the Singapore government, the Supplementary Retirement Scheme (SRS) has nothing to with your CPF savings. It is a voluntary savings account that you can contribute to. While many websites and bloggers compare them together, the CPF and SRS are completely different and should be viewed differently.
Features of the Supplementary Retirement Scheme
There are 3 key features of the SRS:
The SRS account is a tax-deferred investment account. That means, the money that you put into this SRS account, will not be taxed for the year. So, if you put $5000 this year, $5000 will be deducted from your taxable income for that year.
When you do eventually withdraw your money from this account at retirement age, you only need to pay tax on 50% of the amount. So, besides being tax-deferring, you also save cost on 50% of the tax. If this sounds complicated, don’t worry, it just means all is good as you save money.
You also do not have to worry about the nitty-gritty of the actual amounts to be taxed or exempted from tax, this will be handled automatically between the bank and the IRAS.
How to Open a Supplementary Retirement Scheme Account
SRS is operated by three banks:
DBS Bank (DBS) Ltd
Overseas-Chinese Banking Corporation (OCBC) Ltd
United Overseas Bank (UOB) Ltd.
You will need to open an SRS account with one of these banks. This can be done in person or very easily through the Internet banking platform of the bank if you have an existing regular bank account with them. Note that you will have to transfer money from your existing bank account to the new SRS account in order to open it. You will then need to link your SRS account to your trading account. This can be done through your stock broker. When you make a trade with your stock broker, simply choose the option to settle the trade from your SRS account. All good stock brokers’ online platform will have this feature. If you are requesting the trade from a human remisier or dealer, inform him/ her that the trade is to be settled by your SRS account. There are some caveats, limitations or things to note (depending on how you see them):
You can only put up to S$12,750 per year for Singaporeans into your SRS account. Foreigners can put up to S$29,750 per year into their SRS account.
The interest for the money inside is only 0.05% which is the same as a regular savings account. However, remember, the purpose is not meant to be a savings account but a tax-deferred investment account.
You cannot withdraw this the money from the SRS account until your retirement age. As of this writing, that retirement age is 62.
In a small way, this is like your CPF savings. However, unlike your CPF savings, you can withdraw any amount of money you like. But, you must withdraw the full amount within 10 years. However, as mentioned, when you do make withdrawals when or after your retirement age, you will have to pay tax for 50% of the amount you withdraw. Remember, this is a taxed-deferred account, not a tax-exempt one. However, you only need to pay tax on 50% of your withdrawals so you do enjoy significant savings. You can read the official information booklet on the SRS by the Ministry of Finance here.
Should You Invest With The Supplementary Retirement Scheme (SRS)?
Okay, hopefully, you now understand the concept of the SRS. But, the million-dollar question or rather $12,750-per-year question is, should you go for this? Remember, the real benefits of the SRS are the savings you enjoy on taxes over the long term as well as the fact that you can investment 100% of the money to enjoy good returns. The side benefit is that the SRS account is like a piggy bank that you cannot open till your retirement age. So, if you lack discipline, this protects your money from you. Here are some perspectives on the matter:
If you are an employed individual and you do not have excess money, then you are better off saving up to $40,000 in your CPF Special Account and collecting a guaranteed 5% interest. Subsequently, you can invest the surplus in your SA from there.
If you are a self-employed individual and do not contribute to CPF, this is a good option as you can withdraw your money in its entirety at retirement age; something, you cannot do with your CPF savings. Plus, you enjoy the tax-deferring and cost-saving benefits of the SRS.
Regardless of whether you are employed or self-employed, it is recommended you put in and invest at least $5000 at a time. This is to minimize your transaction costs so that it is not more than 0.5% (because the minimum brokerage fee is $25 for most stock brokers). The problem with investing in a smaller amount is that the transaction costs will form a significant percentage of your invested amount. This percentage will negate the returns that you will get on the investment, to a certain extent.
If you don’t think you will live to 62 and don’t have anyone to pass on your money to if you die, then the SRS is probably not for you.