Most of us would agree that retirement planning is important, regardless of the stage of life you are currently in. In Singapore, CPF LIFE is our go-to annuity scheme that provides Singaporeans and Permanent Residents (PRs) with a monthly payout from age 65 onwards (with the option to defer till age 70) for as long as they live.
While CPF LIFE is useful in providing us with a basic income to ensure that our daily needs are met, we should strive to plan beyond CPF LIFE for our retirement income, especially if we want to enjoy a little extra during our golden years.
The Supplementary Retirement Scheme, also known as the SRS, is one way that can help us increase the savings for our retirement. Unlike the CPF scheme, contributions to our SRS accounts are voluntary. Any savings contributed to our SRS account are also available for a dollar-for-dollar tax relief. In addition, the Supplementary Retirement Scheme is also available to foreigners who are working in Singapore.
#1 Enjoying Tax Savings
A dollar saved is a dollar earned. The simple logic here is that the more you save today, the more you are going to have for your retirement.
Each year, you can top up your SRS account to a maximum of S$15,300 for Singapore citizens and PRs, and S$35,700 for foreigners. Contributions made to your SRS account are also eligible for dollar-for-dollar tax relief, subject to a maximum personal income tax relief of S$80,000 per year. This is one key incentive for topping up your SRS account.
For example, if you earn a monthly income of S$6,000 and receive bonuses that add up to 3 months of your salary, your total income for the year would be S$90,000. Assuming you only enjoy the earned income relief (S$1,000) and CPF contribution relief (S$18,000), your chargeable income would be S$71,000 for YA2020, resulting in a personal income tax payable of S$2,720.
If you contribute S$10,000 to your SRS account, your personal income tax will be reduced to S$2,070, resulting in an immediate one-off saving of S$700, which would have otherwise been used to pay taxes.
In total, you would have set aside S$10,700 (S$10,000 in your SRS account + S$700 tax savings) which can be used for your retirement.
#2 Investing Your SRS Savings
In order to effectively plan for your retirement, you need to ensure that inflation isn’t going to be eating into the savings that you have set aside.
Your SRS savings, when left uninvested, will only earn you an interest of 0.05% per annum from the bank that you save it in. In order to beat inflation, you need to be investing your SRS savings. Moreover, since you are only allowed to make penalty-free withdrawals after you reach the retirement age, the SRS scheme incentivises you to take a longer-term investment horizon, assuming you start early. Having a longer investment horizon may allow you to take on a degree of risk with your investments (of course, subject to your risk appetite) since you will have a longer window to recover from any potential downturns.
There are numerous types of investments that we can make with our SRS savings. These range from asset classes which have lower risk, such as the Singapore Savings Bonds (SSB) or fixed deposits, to higher-risk asset classes such as individual stocks listed on the Singapore Exchange. There are also unit trusts or insurance plans that you can purchase using your SRS savings.
You should look at each of these asset classes individually to understand the pros and cons of investing in these products and ascertain for yourself their risk-return trade-off.
For example, based on a 2% per annum return compounded over a period of 10 years, the S$10,000 savings in your SRS account would have potentially grown to S$12,190. If you hold it over a longer period of 20 years, this increases to S$15,802. Now, if you earn just 0.05% interest over the same 20-year period, your SRS savings would have grown to S$10,100 – essentially, you would have lost out on more than S$5,700.
If you want higher returns and are willing to take on more risk, you can invest in asset classes such as individual stocks or unit trusts. Assuming a return of 6% per annum, you would have potentially almost doubled your S$10,000 investment to S$17,908 after 10 years. After 20 years, your investment would have potentially increased to S$32,071. Again, if we compare this to the S$10,100 your SRS savings would grow into given a 0.05% interest rate over 20 years, you would have lost out on almost S$22,000!
Now, this illustrates the different returns on just one year’s worth of savings. Assuming you consistently set aside the same amount of SRS savings each year for 20 years and diligently invest those savings, you can potentially multiply the difference in your returns many-fold. The difference between investing and not investing your SRS savings becomes a lot more dramatic.
You need to decide for yourself what your goal is for your SRS savings in terms of the returns you get and also consider how much risk you are willing to take with these SRS funds.
#3 Investing Your One-Off Tax Savings
Remember the S$700 tax savings that you saved earlier on for contributing to your SRS account?
It would be easy to simply spend the one-off savings that you got but what would really make it work is if you were to save and invest the savings for your retirement over a long period of time.
While S$700 may not seem like much, when invested over a period of 20 years, at a compounded return of 6% per annum, it will become S$2,244, or more than three times your initial capital. Imagine doing this each year for the next 10 years. Just by investing your tax savings over a long-term period, you could accumulate a substantial amount for your retirement nest egg.
As your income increases, you may find yourself in a higher tax bracket and this will lead you to save more than just S$700 in tax savings. You can also contribute up to S$15,300 each year (for Singaporeans and PRs) to further boost your tax savings. For example, for an individual who is at the highest tax bracket (chargeable income in excess of S$320,000), the tax rate will be 22%. A contribution of S$15,300 will translate into income tax savings of S$3,336.
#4 Tax Savings On Withdrawal From SRS Account After Retirement Age
Withdrawal from your SRS account after the statutory retirement age (currently 62) can be made with only 50% of the withdrawal amount subject to income tax. You can decide how much you wish to withdraw each year, as long as you complete all your withdrawals within 10 years after the first withdrawal was made.
For example, if you stop working at age 62, you may find yourself without any income for a period of three years since CPF LIFE payouts only commence at age 65. Assuming you have S$200,000 in your SRS account, you may choose to make a withdrawal of S$40,000 per annum, giving you a monthly income of about S$3,300. Only 50% of the S$40,000 (S$20,000) withdrawn will be considered as taxable income.
Since the first S$20,000 is tax-free, and you are no longer working (in other words, you do not have other sources of income), you will not have to pay any income tax for the year. After three years, you would have withdrawn a total of S$120,000 from your SRS account while having potentially paid no income tax at all during this period.
At age 65, your CPF LIFE payouts can be commenced. If you have set aside the Enhanced Retirement Sum (ERS) (S$271,500 in your retirement account at age 55, as of 2020), you will get about S$2,030-S$2,180** a month, or about S$24,360-S$26,160** a year. To supplement your income, you can withdraw another S$16,000 each year from your SRS account, over the next five years. In total, you would only need slightly more than eight years to withdraw the entire sum of S$200,000 from your SRS account, potentially without having to pay any income tax at all.
This illustrates how withdrawals of your SRS funds can be done in a smart way that maximises your income in your retirement years.
Start Planning For Your Retirement By Opening An SRS Account Today
One of the open secrets to a successful retirement plan is the need to have the discipline to be saving and investing regularly, especially from a young age. Having the knowledge on what you need to be doing is important. But being able to actually develop the habit to save and invest regularly towards your retirement is key.
The Supplementary Retirement Scheme not only gives you the incentive to save up for your retirement (via tax incentives) but also provides a useful structure that you can use to remind yourself that you need to save and invest for your retirement.
As you may already know, the minimum statutory retirement age will be raised from 62 to 63 from 1 July 2022, and gradually to 65 by 2030. Given the higher retirement age in the coming years, it makes sense for you to fund your SRS account now, if you’d like to participate in the scheme.
According to the Ministry of Finance, withdrawals made from your SRS account are penalty-free if they take place after the statutory retirement age, as of when your first SRS contribution was made. This is currently 62, but if you make your first SRS contribution after the retirement age is raised, you’ll have to wait longer to make penalty-free withdrawals.
What this basically means is that if you open and contribute to your SRS account today, even if it is just S$1, you will be able to withdraw your SRS money at age 62, without any penalty, even if the statutory retirement age were to be raised in the future.
Opening an SRS Account is simple. You can do so easily via online banking with a local bank if you already have an existing internet banking login. In the case of UOB, even if you are not an existing bank customer, you can still apply online for an SRS account with the use of MyInfo.
*Insured up to S$75k by SDIC
**Payout figures are estimates, based on the CPF LIFE Standard Plan and computed as of 2020. They may be adjusted to account for long-term changes in interest rates or life expectancy. Such adjustments (if any) are expected to be small and gradual.
This article is brought to you by UOB. It was first published on DollarsAndSense.sg
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