Retirement Planning Singapore – How effective is the SRS Account?

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Retirement Planning Singapore - How effective is the SRS Account?

The SRS Account as a retirement tool in my view is restrictive but may be used to good effect if (a) you have sufficient liquidity already; and (b) certain financial products that are part of your investment strategy are similarly eligible forms of investment under the SRS scheme.  Therefore, you may enjoy beneficial tax savings as well as still being able to use the monies in the SRS account for relevant investments.

Supplementary Retirement Scheme: Introduction

Allows for tax relief of up to $12,750 contributed to the SRS account in any year. Quote “50% of your accumulated SRS savings will not be taxed (i.e. a 50% tax concession) when you withdraw  after reaching the statutory retirement age (Age 62). You may spread your SRS withdrawals over 10 years.” Monies in the SRS account cannot be withdrawn until retirement but can be used to invest in a number of financial products.

Please see more details on SRS Account here.

 

Summary

Negative Aspects of the SRS Account,
  • Returns. The returns of monies in the accounts is nominal at less than 1% annual interest.
  • Penalty for withdrawal. Monies contributed to the SRS account suffer substantial penalty should they be withdrawn.
  • Restrictive for investments. Only certain shares, bonds, unit trusts, fixed deposits and insurance subject to numerous criteria.

 

5 Reasons why the SRS Account can still be useful for Retirement Planning,

On the flip side, there are some benefits to using the SRS Account such as

  1. Tax Planning. SRS Account is one of the few active tax planning tools we have to defer tax payable to later years. This can be particularly helpful if you are hitting a high marginal tax rate
  2. Investments. If the investment plan is already to invest in certain financial products that are similarly eligible investments (such as Singapore shares) from monies in the SRS Account, it may make sense to enjoy the tax relief and contribute monies to the SRS Account.
  3. Diversify. If you already have sufficient monies in cash (in terms of liquidity), it may make sense to diversify and put some monies in the SRS Account so that you can more invested in the market (as monies in the SRS account should theoretically be constantly invested as the converse is that they are earning little returns from interest)
  4. Restrictive for Retirement. Restrictive may be a good thing as we are not encouraged to move monies around and let alone touch the monies as they are solely meant for retirement. Additionally, given that monies can be withdrawn over a 10-year period, it will be likely that even though 50% of the SRS withdrawals will be taxed, the tax will be at a lower income bracket (or even potentially tax free)
  5. Enormously Beneficial for People near Retirement. The downside of the SRS account is that there is a lack of visibility that a young person may have on the funds that he may actually require (eg. A 32-year old is required to “lock up” funds in the SRS account for a substantial period of 30-years with penalty for withdrawals during this period. It is difficult for him to forecast if he might actually require the funds for a certain down payment of his house, buying of a car etc.). However, the closer a person is to retirement age, the more certain he is able to put aside money into the SRS account (eg. for a more senior person at the age of 57, he will have a better gauge on whether he would need the funds during the next 5-years until retirement at the age of 62.) By just differing this income for a relatively short period of time, he can save substantially on tax.
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