Tax savings from SRS can add up

Q: Should I start contributing to my SRS now that I’m in my late 30s?

As the end of 2023 draws near, many people will be considering contributing to the Supplementary Retirement Scheme (SRS) to reduce their tax payable.

DBS Bank’s head of financial planning literacy Lorna Tan says the SRS “is a voluntary scheme to encourage individuals to boost their savings in their golden years while enjoying tax relief”, adding: “You can reduce your final tax payable by getting a dollar-for-dollar tax relief on your SRS contributions that reduces your chargeable income.” The yearly maximum SRS contribution allowable from Singapore citizens and permanent residents is $15,300, while that from foreigners is $35,700.

There is a 50 per cent tax concession on your withdrawal sum – that is, only half of your SRS withdrawal is subject to tax – for the next 10 years when you withdraw the funds at or after the statutory retirement age that was prevailing when you made your first SRS contribution. This could be at either age 62 or 63.

You may withdraw your SRS savings at any time, although early withdrawals are fully subject to tax and attract a 5 per cent penalty.

You may also apply to withdraw your SRS savings on grounds of bankruptcy. The entire amount withdrawn is subject to tax. The penalty for early withdrawal does not apply.

Note that a personal income tax relief cap of $80,000 applies to the total amount of all tax reliefs claimed for each year of assessment. This includes your SRS contribution.

An SRS account can be opened with DBS, OCBC Bank or UOB.

Here are some concerns investors may have.

I’m in my 30s. Should I open an SRS account and start contributing? Experts suggest looking closely at the amount of tax savings before making a decision. For example, assume that your chargeable income (which is after reliefs) is $90,000. After looking at the tax rate table, if you still have not hit the tax relief threshold, then by contributing $10,000 to your SRS account, you will bring your chargeable income down to $80,000. This puts you in a lower tax band. The $10,000 would have attracted tax at 11.5 per cent, so that is a $1,150 tax saving.

Phillip Securities’ senior financial services manager Elijah Lee cites the example of a client whose income had gone up from about $140,000 in 2021 to $150,000 in 2022. His projected income tax rose by about $1,000, from $5,600 to around $6,600, representing an 18 per cent increase.

The client opened an SRS account on Mr Lee’s advice and contributed the maximum sum of $15,300. He was then able to bring down the tax from $6,600 to $4,800, representing around a 27 per cent saving in his tax bill.

However, Mr Lee adds that for some people in their 30s, they may be claiming other reliefs such that they are already close to the $80,000 tax relief threshold. Even if they contribute to SRS, they may not enjoy significant additional tax savings.

One scenario would be someone whose parents live with him. Subject to meeting the relevant criteria, he can enjoy parent relief of $18,000.

Another scenario would be women who get the Working Mother’s Child Relief (WMCR). For a qualifying Singaporean child born or adopted before Jan 1, 2024, the mother can enjoy relief at 15 per cent of her earned income. A second child will permit the mother to get 20 per cent relief of her earned income. If the mother is a higher-wage earner, these reliefs may move her quickly to the $80,000 cap.

Note, however, that the WMCR will change for children born or adopted on or after Jan 1, 2024. The relief will become a fixed relief instead. For example, it will be $8,000 for the first child and $10,000 for the second child.

Resident income tax rates From year of assessment 2024

Someone in their 50s and close to retirement who is thinking of contributing to SRS DBS’ Ms Tan notes: “In fact, if you belong to a higher income bracket, the potential tax reduction from maxing out the SRS contribution for the year can be significant. You are also closer to the age of 62 or 63 when you are able to get a 50 per cent tax concession on your withdrawals.”

Many have left their funds untouched in the SRS since opening an account

Ms Tan suggests deploying SRS savings into investments, instead of leaving them idle to earn the paltry interest of 0.05 per cent per annum.

As at Dec 31, 2022, 21 per cent of the total SRS contributions of $16.33 billion – amounting to about $3.42 billion – was left idle in cash, according to Ministry of Finance statistics.

SRS funds can be invested in products such as T-bills and Singapore Savings Bonds, bonds, fixed deposits, shares, single premium insurance and unit trusts, says Ms Tan.

If you contribute and invest $15,300 of your SRS balance every year for 20 years and it appreciates at 5 per cent per annum, this could multiply to about $505,900, Ms Tan notes.

Timing of withdrawals to minimise tax Withdrawals can start from the statutory retirement age that was prevailing at the time of your first SRS contribution. This could be either age 62 or 63 or anytime thereafter, as the penalty-free 10-year withdrawal period only starts from then.

As only 50 per cent of withdrawal (post-statutory retirement age) is taxable, Ms Tan suggests staggering the withdrawals to minimise tax.

Example: A Singapore resident has an SRS balance of $400,000. He withdraws $40,000 each year, over 10 years. This means that 50 per cent of that amount, or $20,000, will be taxable each year. If he has no other source of taxable income, he will not need to pay any income tax as the first $20,000 of total annual income is taxed at 0 per cent.

An important point to remember, according to Ms Tan, is that SRS withdrawals need not be in cash. This means you are able to hold on to your SRS investments, instead of having to liquidate them first before withdrawing them in cash.

Other tips on timing and amount of contributions

To enjoy the tax relief benefit in the year of assessment following the year of contribution, Ms Tan reminds investors to contribute to their SRS by Dec 31. If you contribute to your SRS account by Dec 31, 2023, you will enjoy tax relief in the Year of Assessment 2024.

She adds that there is an ongoing promotion – up to Dec 2 – whereby DBS/POSB customers can get up to $100 cash credit when they open an SRS Account online, top up and invest, subject to certain conditions.

Ms Tan says people need to identify how much risk or capacity for loss they are willing to take before deciding on products. Other factors to consider include whether they have adequate insurance and emergency cash of at least three to six months of expenses, or more if there are dependants, as well as their investment time horizon.

Phillips’ Mr Lee notes that those who have stable jobs can set up a standing instruction to make the contribution annually. However, for those with more fluid job circumstances, they can contribute at the end of the year when they are sure they have sufficient liquidity.

He also says there are some people who may have spent on big-ticket items, like home renovations or weddings, and thus may choose not to contribute that year.

To be on the safe side, Mr Lee suggests that investors avoid the year-end rush and not leave it to Dec 31 to make their contribution.

He also suggests that younger investors open an account and make a contribution – the minimum is $1 – so as to lock in the retirement age at which the 10-year penalty-free withdrawal period starts.

Considerations when deciding on the types of investments

DBS’ Ms Tan reminds investors: “If you are close to withdrawing from your SRS, you should invest in short-term products that match your investment time horizon. Examples of short-term products include T-bills, fixed deposits and short-term endowment plans.”

Considerations if SRS funds have been used to buy a life annuity or annuity

Term annuity

If you have insurance policies such as endowment policies and term annuities in your SRS account at the end of the 10-year withdrawal period, you do not need to close your SRS account or surrender your insurance policies.

The value of the insurance policies (based on surrender values determined by the insurance companies), together with the cash and market value of other investments in the SRS account, will be deemed to be withdrawn.

The SRS operator will report 50 per cent of such balance to the Inland Revenue Authority of Singapore, and this is subject to tax in the following year.

Life annuity

In the case of life annuities purchased with SRS funds, the 10-year withdrawal period does not apply. So long as you continue to receive your annuity payments for life, 50 per cent of the annuity payments will be subject to tax each year.

Phillip’s Mr Lee says that a person who sets aside around $200,000 for such a life annuity would get around $6,500 to $7,500 a year for life. While it may seem onerous that 50 per cent of the annuity payments will be subject to tax, in this case, even though half of this sum is deemed as income, it does not attract any income tax as it falls within the 0 per cent tax bracket. This is assuming there is no other taxable income.

Bottom line

Providend’s chief executive officer Chris Tan says of the scheme: “SRS is a deferred-tax scheme to encourage retirement savings. It is strongly encouraged that the amount of tax saved should be reinvested and not consumed as well.”

For those with the liquidity and especially those who are close to retirement age, the SRS may help in reducing their tax bill.

Investment involves risk. Past performance is not necessarily a guide to future performance or returns. The value of investments and the income from them can go down as well as up, and you may not get back the full amount you invested.

If you are in doubt, you should consult your stockbroker, bank manager, solicitor or other professional advisers.

Repurpose article from the Strait Times.