One of the biggest worries of Singaporeans is whether or not they’ll have enough funds to retire comfortably.
Opening and investing in a Supplementary Retirement Scheme (SRS) account can be part of your long-term investment strategy if you’re one of the believers that saving for retirement should begin from the time you start earning money.
The SRS was established by the Singapore government in 2001 to complement the compulsory Central Provident Fund (CPF) retirement savings scheme.
Looking back, it’s hard not to consider how helpful this idea has become, especially in today’s era where a crisis is most likely to happen. The ability to adapt quickly to shifting circumstances is becoming a necessity in today’s world, where new strains of COVID-19, job cuts, and economic downturns are all on the rise.
Why should you open an SRS Account?
The pitiful interest rate of an SRS account at 0.05%, makes opening one seem like less than a brilliant financial move. It’s arguable that the interest earned on the same sum of money invested in a CPF Special Account would be much higher.
The primary advantage of an SRS account is the tax relief it provides on taxable income, which comes up to the annual contribution cap of S$15,300 for Singaporeans and S$35,700 for foreigners residing in Singapore.
Your SRS contributions and earnings must remain in the account until the statutory retirement age determined at the time of your first contribution in order to qualify for the tax benefits and penalty-free withdrawals. You can open an SRS account online in any of the three major banks (DBS, OCBC, UOB).
Keep in mind that if you take the money out before you reach the retirement age, you’ll owe taxes on the entire sum plus a 5% penalty. There are two notable exceptions, however: withdrawals for medical reasons and bankruptcy.
So, the next question is, “What are you supposed to do with your SRS account?”
How does an SRS account works
#1 - Protecting your savings from inflation
The rising cost of living expenses is something that can’t be ignored. Inflationary concerns and the highest increase in interest rates in over two decades have made grocery shopping a stressful experience.
Some of the helpful ways you can increase your savings rate and reduce your tax liability at the same time is by contributing more to your SRS.This is especially true for those whose income brackets are between S$40,000 and S$80,000 per year, where the tax rate increases by 3.5 percentage points.
Investing is one way to ensure financial security in the future. Make sure you have enough money saved up to cover your expenses for at least six months before doing that. Remember to invest more than the current 2% inflation rate in Singapore if you want to see a return on your money.
Investing via an SRS account gives you access to a wider variety of investment products, such as unit trusts, insurance plans, stocks, ETFs, REITs, and Singapore Savings Bonds, than investing through a CPF account does, which is largely controlled by the CPF Board.
You may see the full details about tax rates here.
#2 - Increasing your retirement savings
The two most common ways for Singaporeans to increase their retirement savings are: transferring money from their Ordinary Account, where they can earn a higher interest rate of 4% and by adding cash (up to a maximum of S$7,000).
Once you know how much money you’ll need in retirement, you’ll also realize that it’s likely not enough to save in just one place. In addition, many of us Singaporeans would have deposited our CPF savings into a real estate investment.
Investing with your SRS account can help you maintain an investing habit, which is effective because it makes it easier for you to increase the size of your retirement savings despite the economic struggles.
In order to maximize the effects of compounding on an SRS account, you should contribute a portion of your money that you won’t need for at least ten years. Therefore, only make a contribution if you have a sufficient emergency fund and other financial obligations, such as providing for your parents’ retirement.
Keep in mind that half of each withdrawal will be subject to tax, therefore it is essential to plan withdrawals in a way that allows you to take full advantage of any tax benefits. For instance, withdrawing at times where the marginal tax rate is at the lowest will help you maximize your return. This simply points toward the additional tax that must be paid.
#3 - Investment returns are tax-free
Investment returns are not subject to taxation, but withdrawals are. To put it another way, if you have the determination to invest a set amount every month (S$2,000, based on the S$15,300 cap) and let compound interest do its purpose, you might be able to achieve your retirement goals.
Singapore Savings Bonds, fixed income, and annuities are low-risk products to consider if you plan to lock away your investment funds for at least ten years. CPF Life, which provides a steady stream of retirement income through monthly payouts, is an excellent example of a low-risk annuity.
If you are willing to take on more risk and have a longer time horizon, you can diversify your SRS portfolio by purchasing stocks, exchange-traded funds (ETFs), or real estate investment trusts (REITs). To avoid making hasty decisions, you should research the products and companies you’re interested in thoroughly first before investing.
Contributing to your SRS account can be a welcome boost to your retirement stash if you are earning an average to a substantial amount of salary who’s looking to diversify your investment portfolio and is aware that you won’t need to withdraw the funds before retirement age.