Should You Have a Supplementary Retirement Scheme (SRS) Account?

The Singapore government started the Supplementary Retirement Scheme (SRS) to complement the Central Provident Fund (CPF) to help Singaporeans meet their retirement needs. Unlike CPF, opening an SRS account is entirely voluntary. And by contributing to SRS, individuals can enjoy tax benefits while setting aside more funds for their retirement, making it a flexible and attractive option for those looking to supplement their retirement savings.

So, should you be contributing to an SRS account?

What is an SRS account?

But first, what exactly is an SRS account? 

As mentioned, the SRS is a voluntary scheme initiated by the Singapore government to support personal retirement plans, making it one of the best retirement plan options available.

Acting as a personal retirement savings account, an SRS account is separate from the mandatory Central Provident Fund and offers greater flexibility in terms of investment options. Though the contributions made to an SRS account are subject to an annual contribution cap, it still allows individuals to receive tax relief (up to a certain limit), reducing their tax liability while saving for retirement.

What are the benefits of contributing to SRS?

1. More retirement savings

Do you know how much you’d need to save for retirement in Singapore? Retirement will be one of the biggest expenses we have in our lives. After all, living for decades without work requires a significant amount of money.

So, when it comes to preparing for retirement, is CPF, a house, and some cash enough to live the retirement of your dreams? For most people, those assets won’t fully cover the bills through retirement. And for those who want to travel and make the most of their golden years, the expenses will be even larger. Here's how you can find out how much you'd need to save for retirement.

CPF is an effective retirement programme, and in fact, Singapore was recently ranked as having the top Asian retirement system in the 2021 Global Pension Index. CPF provides a foundation for Singaporeans’ retirement, paired with personal savings. But, particularly for individuals with salaries above $100,000 SGD per year and commensurate lifestyles, CPF alone is probably not sufficient if they want to maintain a similar quality of life to which they were accustomed to during their working years.

Why would CPF not necessarily be enough? Let’s dive into an example:

Take a married couple that started their careers with salaries of $3,000 SGD per month per person.

• Over 40 years, they get to a salary of $9,500 SGD per month per person. During this time, they've also used CPF to pay for a $500,000 SGD property down payment and mortgage in their 30s or 40s.
• At the age of 65, they would have combined CPF balances equivalent to approximately four times their annual salaries. This amount is calculated after their CPF Life Enhanced Retirement Sum and Medisave accounts have been deducted.

In this case, the sum of their CPF Life Enhanced Retirement monthly payout and the income generated from the remaining CPF balances would be able to fund a combined income approximately only equal to 40% of pre-retirement income for 20 years, or 25% for 30 years.

SRS is one way to make up for the difference. When you contribute to SRS, you'll get significant tax incentives. Plus, you'll also be putting more towards your retirement.

2. SRS tax reliefs

The SRS tax reliefs are the most notable benefits of opening an SRS account. Every year, Singaporeans and PRs can deduct up to $15,300 SGD from their taxable income by contributing that amount to an SRS account. For foreigners, that amount is capped at $35,700 SGD per annum.

When you withdraw the funds upon or after you reach retirement age, half of the amount you withdraw will be subject to tax. So, if in a given year you withdraw $40,000 SGD, $20,000 SGD will be taxed. And if you don't have any other personal income, this $20,000 SGD would be tax-free, as the first $20,000 SGD of personal income in Singapore isn't taxable.

By contributing over a period of 30 years, you can save more than $100,000 SGD on taxes as a Singapore Citizen or Permanent Resident. Learn more about the tax benefits of SRS.

Are there any disadvantages to SRS?

1. SRS withdrawal restrictions

In exchange for the tax advantages, the Singapore government expects citizens and permanent residents to keep their money in their SRS account until at least age 63.

Foreigners can withdraw before the retirement age without early withdrawal penalties, as long as they have had their SRS account open for at least 10 years and they withdraw the entire SRS amount in one lump sum.

Withdrawal penalties are strict, yet straightforward, with SRS. Here's what you need to know:

• You can only withdraw penalty-free if you're withdrawing at the statutory retirement age set when you make your first contribution. If you withdraw before then, you'll pay a 5% penalty on the withdrawn amount and taxes on 100% of the withdrawal (not 50%!).
• Once you start withdrawing at or after the statutory retirement age, or if you withdraw for medical reasons, you won't be allowed to contribute to your SRS account again.
• You can withdraw without paying the penalty only if you plan to use the money for medical reasons, if you declare bankruptcy, or if you pass away. In the case that you pass away, your SRS funds will go to your estate or the government.

That said, you can open an SRS account and deposit just $1 SGD to kickstart the lock-in period, which can bring forward your eligible withdrawal date. Here's how both foreigners and Singaporeans and PRs can benefit from opening an account early:

• For foreigners, the sooner you open an account and make a deposit, the sooner the 10-year lock-in period starts. That means that the sooner you deposit, the sooner you'll be able to withdraw.
• For Singaporeans and PRs, opening an SRS account today will allow you to withdraw your funds at the current statutory minimum retirement age of 63. This protects you from possible future raises to the retirement age.

If you open an SRS account, just make sure you’re confident enough that you won’t need to withdraw the funds early.

1. SRS low interest rates

SRS accounts have very low interest rates - if you keep it in the SRS account. When we say incredibly low, we’re saying they’re fixed at just 0.05% per annum.

But, these low interest rates are only a disadvantage if you don’t invest the funds. If you don’t invest the funds, you’re better off keeping the money in rather than tying them up for decades.

So, if you open an SRS account, just make sure you invest it.

• If you contribute $15,000 SGD per annum and you keep it in cash, you’ll have $300,000 SGD after 20 years;
• but if you invest the savings at 6% net returns per annum, you'll have over $550,000 SGD after the same 20 years.

3. SRS investments can be taxed at withdrawal

If you were to invest your contributions, but your investments incurred a loss, you won't be able to top up the account to make up for the difference.

With that said, it’s crucial that you invest intelligently so that you can make the most of your contributions for tax relief and retirement purposes. And if your investments earn profits, those profits will be taxed at withdrawal, as they're treated as part of your SRS withdrawal amount. So at withdrawal, 50% of each withdrawal you make will be taxed, and this includes the returns on your investments.

As Singapore doesn't tax capital gains, dividends, and interest on financial investments, SRS is actually a worse tax treatment. However, due to the tax advantages at deposit, the math still works, and from a tax perspective it makes sense to use SRS.

Additionally, there are ways to make the most of your SRS account, especially by strategising your withdrawals to reduce your tax exposure, as you're allowed to withdraw over a maximum period of 10 years. So, you can withdraw your funds in those years where you expect to have an overall lower taxable income.

Should you open an SRS bank account?

Opening an SRS bank account may suit you if:

• you're a a middle- to high-income earner;
• you know you won’t need to withdraw the funds early; and
• you plan to invest the money.

If you fit the above criteria, contributing to SRS can upsize your retirement stash.

You can open an SRS account with any of the 3 managers of the programme: DBS, UOB, or OCBC. And if you’re wondering which SRS account is better, all SRS accounts are essentially the same in terms of the investment products available. The only distinguishing factor is the possibility of sign-up benefits offered by banks.

But, when it comes to investing the funds, don’t stop at the ones offered by your bank, as their list of funds won't be complete. Do your homework and look at fees and management strategies. If in doubt, ask your preferred fund manager or financial advisor if they can invest your SRS. Or, invest your SRS with StashAway.