If you are planning for your retirement and haven’t heard about the Supplementary Retirement Scheme (SRS), you might be losing out!
What is Supplementary Retirement Scheme (SRS)?
SRS is a voluntary scheme to encourage individuals to save for retirement, over and above their CPF savings. Contributions to SRS are eligible for tax relief and only 50% of the withdrawals from SRS are taxable at retirement. By spreading your SRS withdrawals over a period of 10 years, you can minimise or might not even need to pay any tax on your withdrawals.
The amount of tax you can save depends on your annual taxable income:
|Annual Taxable Income||Tax payable WITHOUT SRS contribution||Tax payable AFTER $15,300 SRS contribution||Tax Savings|
Ok, we agree that the idea of SRS is a bit hard to grasp especially if this is the first time you are hearing it. So we have stepped forward and summarised it for you:
What’s the catch?
Penalty. As the name suggests, SRS is a scheme to encourage saving for retirement. Therefore, for withdrawals made before the statutory retirement age, a 5% penalty based on the amount withdrawn will be imposed. In addition, the full amount withdrawn will be subject to tax.
The statutory retirement age is currently being set at 62 years old and is expected to increase to 63 years old in 2022. Your statutory retirement age for penalty-free withdrawal is based on the statutory retirement age prevailing at the time of your first contribution.
Cap on SRS contribution and personal income tax relief. The maximum amount that you can contribute annually to your SRS is capped at $15,300 for Singapore Citizens and Permanent Residents and $35,700 for foreigners.
However, do note that there is a total personal income tax relief cap of $80,000 per year. This means that if the total amount of your personal tax reliefs for the year is already more than $80,000 (including CPF relief, parents’ relief, working mother’s child relief), your contribution to SRS will not be eligible for further tax relief.
What should you do with your SRS savings?
SRS is no doubt a useful tool to gain tax benefits and save for retirement. As of Dec 2018, data from Ministry of Finance (MOF) shows that 30% of SRS money stays as cash. Do you know that monies parked in your SRS account as cash only earns 0.05% p.a. interest? This does not sound wise financially as your hard-earned retirement savings will just be easily eroded by inflation. What should you do with your SRS savings?
What People Do With Their SRS Funds?
Considering SRS savings as part of your retirement nest egg, it is not hard to realise that asset growth is essential, not only to combat inflation, but also to fund a comfortable retirement life.
You can invest your SRS funds in a wide range of financial instruments such as unit trusts, insurance, fixed deposits, stocks, Singapore Saving Bonds and so on.
For a novice investor, researching various financial instruments and committing real dollars into investments can be time-consuming and intimidating. If sleepless nights are not what you are after, then these are 2 options that can help:
1) Retirement Income Insurance Plans – Generating fixed income stream for you
Now, imagine your life after retirement: while you are away feasting some local delights in your dream vacation, you get paid a monthly “salary” just like when you were still working, how fantastic is it?
Without having to worry about market ups and downs, rain or shine, retirement income plans are designed to pay out a stream of income (guaranteed + non-guaranteed portions) to you, just so that you can pursue the comfortable retirement life you deserve.
The table below shows 2 different retirement income plans approved under SRS:
Profile: Female, age 45 last birthday
|SRS Products||Tokio Marine Retirement @ 63||Manulife Retire Ready Plus II|
|Income Payout Begins at||Age 62||Age 65|
|Income Payout Amount (Projected at 4.75% p.a.)||$4,878 per year (of which $2,323 is guaranteed)||$6,263 per year (of which $3,600 is guaranteed)|
|Payout Duration (Years)||10||10|
|Total Payout Benefits (Projected at 4.75% p.a.)||$48,780 (of which $23,230 is guaranteed)||$62,633 (of which $36,000 is guaranteed)|
|Total Illustrated Yield (Projected at 4.75% p.a.)||3.80% p.a.#||3.95% p.a.#|
#from the Product illustrations, if the projected investment return is at 3.25% p.a., the total illustrated yields for Tokio Marine Retirement@63 and Manulife Retire Ready Plus would be 2.32% p.a. and 2.59%p.a. respectively.
Taking Manulife Retire Ready Plus II as an example, the plan allows you to receive an income stream which comprises both guaranteed and non-guaranteed components. A female who starts the plan at 45 years old could earn an illustrated yield of 3.95% p.a.. To tailor to every individual’s needs, these plans are customisable to take into consideration your desired retirement age and how long you want your income to last.
2) Low-cost Investment Portfolios – Growing your retirement egg with Nobel Prize winning solutions
Diversification is a big word and it is a vital process in investing. Owning the shares of 3 Singapore companies is more diversified than owning just one, but we know this is not enough, what if the Singapore economy goes through a downturn?
As such, we do not encourage betting your entire retirement funds on just 1 or 2 companies’ shares/bonds because it can cause you much stress. Instead, we put together an investment portfolio with broad diversification across different countries, sectors and even instruments in order to achieve the returns you need according to your risk appetite.
You should also pay attention to the fees involved, as high sales charges, expensive management fees can eat away your returns.
MoneyOwl is diligent at keeping cost low for clients and at the same time maintaining an investment portfolio that is broadly diversified. Instead of constantly trying to time the market, which results in higher transaction costs, we advocate staying invested as a more reliable approach to achieve the desired returns – as validated by many empirical studies.
Depending on your risk appetite, we will have the right portfolio for you.
|Portfolio||MoneyOwl Balanced Portfolio||MoneyOwl Equity Portfolio|
|Risk/Return level||Mid Risk and Return||High Risk and Return|
|Asset Allocation||60% Global Equities + 40% Global Bond||100% Global Equities|
|Projected Annualised Return* (Net of fees#)||5.3%||6.8%|
If you are a 45-year-old and start a $20,000 investment in MoneyOwl Equity Portfolio today, by the time you turn 65, the projected value of your portfolio could be $74,551 (Based on 6.8% net-of-fees projected return).
*Projected returns are based on the historical indices returns of Dimensional Global Core Equity Index, Dimensional Emerging Markets Adjusted Large Caps Index & FTSE World Government Bond Index 1-5 Years (hedged to SGD) from Jan 1994 to December 2017. Please note that past performance is no guarantee of future results.
*Projected Annualised Returns are net of estimated total expense ratio (TER), custodian/platform fees, and advisory fees. For more information on MoneyOwl’s portfolios projected return and fees structure, please visit: https://www.moneyowl.com.sg/investment
This article was contributed by MoneyOwl’s Solutions Team.