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Saturday, 5 May 2018

Retirement Planning: When Supplementary Retirement Scheme (SRS) becomes a downside


This post is triggered from SRS being a better fund for "Guarantee Return" Endowment Plan GE270 rather then cash on hand.

I will only focus on what are the possible downside and not the regular upside you can find online.



Now, why use SRS fund for a low risk low return with certainty (eg. GE270) rather then high risk high return equity?

Before we start discussing the downside of SRS, you can refer to the link below for an overview of SRS and the latest enhancement plus new contribution rate.

https://www.mof.gov.sg/MOF-For/Individuals/Supplementary-Retirement-Scheme-SRS



In retirement planning, we need some certainty or at least a target figure for x number of years to support our lifestyle if we choose not to work or our age does not allow us to work.

In the case of SRS, we need to know the amount stated in MOF that allow us to pay the least tax or no tax for the amount (currently at $400k), we can withdraw (currently within 10 years) when we reach the statutory retirement age (currently 62 years old).

From the above statement we can start listing down what are the possible down side of SRS Account.

1. The tax exemption amount (currently at $400k) might not increase with inflation rate.

That means if you manage to accumulate for example $1 million due to good investment returns you "might" just pay back the tax you saved for years from the tax you paid for each SRS withdrawal.

This is also why GE270 seems like a good deal as a low risk low return with certainty compare to 0.05% interest rate from the bank if the tax exemption amount does not increase.

The tax exemption rate is really the "KEY" for incentives from SRS fund.

You can go to the link below to check out the tax bracket and do your own calculation to avoid "paying more tax back" from the tax you saved.

https://www.iras.gov.sg/irashome/Individuals/Locals/Working-Out-Your-Taxes/Income-Tax-Rates/

2. If a party hit the maximum SRS contribution cap for the year and the investment have an opportunity to average down at a good price from the company rights issue, the party could not subscribe to the rights entitlement if

a) the money in the SRS account is all used up
b) the investment/stock is only purchased with SRS funds.

Again, the certainty from product like GE270 or in the future Singapore Saving Bonds (SSB) seems like a less complicated way to grow the money in SRS and controlled in growth not to pay back more tax then what was saved.


3. (edited) Your SRS funds is also part of your estate upon death. There will be a 50% of the withdrawal subject to income tax. If a party could not withdraw out in 10 years time or for an example passed away when the party managed to accumulated $800k,

First $400k exempted from Tax
Next $400k x 50% = $200k

With no other income,  the tax payable is $21,150.

You can refer to the link below for Tax on SRS withdrawal
https://www.iras.gov.sg/irashome/Individuals/Locals/Working-Out-Your-Taxes/Special-tax-schemes/Supplementary-Retirement-Scheme--SRS-/Tax-on-SRS-withdrawal/

4. The last point I wanna to touch on might not happen unless

a) the retirement age increased
b) tax increased from a higher salary package for "full time employee" (currently is $1200 from 1 Jul 2018 which is still insignificant)

The withdrawal amount plus your full employee income get you taxed more then you saved in your younger days.



The solution is Retirement Planning!

SRS Account should be "ONE OF THE" retirement vehicle that help you in the long run.
Learn to catch up with the rules & regulations and allows it to help you save instead of pay.

SRS is not necessary for Everyone unless your high income earning is definite.

A Dollar Saved is A Dollar Earned but don't do it blindly and become pound foolish penny wise.

I did not touch on Early Withdrawal because the moment you start your SRS journey you must already planned to keep the money untouched unless special circumstances occur.

This blog post is not to deter anyone to open an SRS account, rather is to provide information on the possible downside to avoid so the SRS account brings in a win win situation and not a someone sure win situation.

Another Good Deed Done!

2 comments:

  1. Hi,
    Can I ask a question if I am women and mother with 4 children. Is there a max personal relief for working women cap at $80000 only. So if I am high income working above $200000. I don't get the benefit of parking my annual salary to SRS as my kids relief is already at $140000. I am tax my full income includinc money I parked in SRS now. When I retire if I have a rental income from Singapore. I am paying more tax today and I Must pay tax again in future for money I thought I had differ in SRS till I am retired.
    Can you help share some light on this matter.

    ReplyDelete
  2. hello, some thoughts on your post.

    on question 1.
    -did some calculations before, even being tax on srs. if we consciously reinvest tax deductions in Sti-etf... it is still useful to put $$$ in srs up to 20yrs ( if u earn 40k a yr), the higher you earn, the more meaningful to put $$$ in srs

    on question 2
    - yes planning is important, i think most people will try to put $$ into srs later part of the year to maximise liquidity... so if along the year there's opportunity to add on rights issue, putting money in earlier should be okay. but still I agree it's a possibility for those who put $$ in srs in stocks pick basis.

    qn3 n qn4 . no doubt those are very valid concerns

    ReplyDelete