Free money from the taxman – A Friendly Introduction to the Supplementary Retirement Scheme (SRS)

To encourage local tax-payers to save more for their retirement, the Government has implemented the Supplementary Retirement Scheme or SRS, a powerful tool for retirement planning.

Why contribute to SRS?

The higher your tax bracket, the more savings you will have if you contribute to SRS.

A Singaporean or permanent resident can contribute up to $15,300 (or $35,700 for foreigners) into an SRS and benefit from lower accessible taxes for a particular year.

For example, if you have an annual income of $150,000, you belong to the 15% tax bracket. If you contribute $15,300 to your SRS account, IRAS will reduce your accessible taxes by $15,300. IRAS will treat you as if you have an income of just $134,700 ($150,000 minus $15,300) in that year, saving you 15% x $15,300 or $2,295 in taxes the following year.

How to set up an SRS account?

You can set up your SRS account with any major local bank like DBS, UOB or OCBC.

I was able to set this up online under DBS in a matter of minutes. This step is extremely crucial because if you set up your account before 2022, you can lock in the withdrawal age of 62. Otherwise, you can only withdraw at the age of statutory retirement at the date when the account is opened.

So it is strongly advised that readers who do not have an SRS account set one up and contribute $1 to it.

What can you do with your SRS account after you fund it?

Once you have made your contribution, the money resides in your SRS account and earns a paltry 0.05% every year, which means that you should not stop at merely setting up the account.

A range of industry players can help you invest your money, but my preferred option is to tie a brokerage account with your SRS. Major traditional brokerages (not discount brokerages like Interactive Brokers) allow you to link your SRS account to them to buy local stocks.

Please note that only stocks approved under the CPF Investment Scheme can be purchased using SRS funds.

A discussion on what portfolio can be built with your SRS would take up too much space, but here’s how I manage mine:

My SRS fund portfolio that generates 6% (cost) yield

My personal preference would be to limit my SRS funds to local blue-chips, business trusts, and REITs to reduce my need to monitor their performance.

I can combine regular dividends with future contributions to increase diversification further.

Disclaimer: I urge readers not to mimic my SRS portfolio because I did not apply a formal methodology to determine which stocks to buy.

Still, I’m happy to show it here, having spent two years contributing to it:

The 6% cost yield ensures that my investments work hard for me over the next 16 years of my life.

Cost of Withdrawing from your SRS

As this is a plan to supplement your retirement, withdrawing your funds before you reach statutory retirement age (or 62 years for those with existing accounts) will be subjected to taxation.

A further 5% penalty will be levied against the funds withdrawn. Also, dividends obtained from your SRS portfolio will be credited back to your SRS account.

Withdrawing SRS funds after the statutory retirement age will attract taxes for half of the sum withdrawn.

In essence, you will be taking a small risk should Singapore raise taxes in the future.

Set Up your SRS account today

Setting up an SRS is virtually riskless.

Readers without an account should set one up via Internet banking after reading this article to lock in your statutory retirement age at 62. Once armed with your SRS account number, the next step would be to link it with a traditional broker account.

In essence,  you can now build up an SGX stock portfolio tax-free.

While this program is a no brainer for folks who have an income tax bracket above 10%, if you are paying taxes this year, there is no harm buying a few low-risk investments from the local stock market.