It is no secret that Singapore is one of the lowest income tax rate countries in the world.
But wouldn't it be better if you could pay even less taxes and save more for the future? After all, a dollar saved is a dollar earned.
“So how?” you might wonder.
Today you will learn a government tax savings program called Supplementary Retirement Scheme. Here, we will cover what is SRS about, how to set it up, how much tax savings can you get and whether is it worth considering it.
So without further ado let’s start!
What Is Supplementary Retirement Scheme?
The Scheme is open to everyone living in Singapore. This means that Citizens, Permanent Residents and Foreigners are all allowed to open an SRS account. Other than to increase one’s retirement nest egg, contributing to the SRS account also allows you to reduce your income tax bill.
The SRS provides two key tax saving benefits.
- Tax saving benefit on contribution
- Tax saving benefit on withdrawal
How You Can Benefit From Tax Savings Through Contribution & Withdrawal of SRS Funds
When you contribute to your SRS account, your chargeable income will be reduced by the amount of your contribution.
For example, if you have racked up $120,000 in chargeable income, your income tax bill will be $7,950 based on the progressive income tax rate by IRAS. If you choose to contribute $12,750 to your SRS account, your chargeable income will be reduced to $107,250 ($120,000 – $12,750) and your income tax payable will become $6483.75.
Here are how the numbers look like:
Without SRS contribution
With $12,750 SRS contribution
Simply by contributing $12,750 to your SRS account, you will be able to reduce your income tax by $1466.25. That is the equivalent to a brand new laptop!
It does sound very enticing but please do note that there is a yearly contribution limit to your
SRS account. The limits are $15,300 per year for Singapore Citizens and Permanent Residents and $35,700 for foreigners.
How To Open A SRS Account
The requirement is straightforward.
- All Singaporeans, Permanent Residents (PRs) and foreigners
- At least 18 years old
- Not an undischarged bankrupt
There are three SRS operators (DBS/POSB, UOB & OCBC). You can register an account with any of them. It has little difference which bank you choose because you can invest in SRS approved assets from any institutions.
How To Invest Your SRS Funds
After you have created your SRS account, you just need to approach your stock brokerage for the linkage. Buying and selling stocks will be the same as what you would normally do on the online trading platform except you have to tick the SRS checkbox to indicate your interest.
Additionally, there are a wide range of assets you can invest in. Remember, you are not restricted to assets or products under your SRS operator. This means you can invest in UOB Bonds even when your SRS account is under DBS.
- Bonds - do note that Singapore Savings Bonds are not allowed at the moment.
- Unit trusts
- Fixed deposits
However, the criteria for insurance is more complex. The following restrictions on insurance purchase via SRS were taken from the MAF:
- Only single premium products are allowed (including recurrent single premium
products, encompassing both annuity and non-annuity plans).
- Life cover (including total and permanent disability benefits) will be capped at 3 times the single premium.
- Plans can allow for a contribution continuation feature/benefit upon disability.
- Other types of life insurance e.g. critical illness, health and long-term care are excluded
You may find the full detail over here.
The second tax saving benefit for SRS occurs when you withdraw your money from the SRS account. Only 50% of the amount that you withdraw from your SRS account is taxable if the withdrawal is after the retirement age (62 years old at the point of writing).
It is also important to take note that the SRS withdrawal can be spread across a maximum of 10 years (unless you have invested in an Annuity or Endowment Plan, you will then be able to withdraw for more than 10 years) to enjoy maximum tax saving benefit.
Below is the example given by IRAS. If you have $400,000 balance in your SRS account, the withdrawal plan and tax payable is as below:
Everything looks great.
BUT! Should you open a SRS account immediately?
Before you head out to do just that, here are 3 factors you might want to consider.
3 Things To Consider Before Contributing To Your SRS Account
#1. 5% Penalty On Withdrawal Before Retirement Age
The Supplementary Retirement Scheme (SRS) savings are for retirement purposes. You should withdraw the money only after the retirement age. However, if you wish to withdraw the money before retirement age, 100% of the withdrawal amount will be taxable.
In addition, a 5% penalty charge will be imposed to your withdrawal. For instance, if you withdraw your SRS account by $40,000 when you are 61 years old, you will be subjected to additional taxable income of $40,000 and also a $2,000 penalty charge.
Therefore, you must ensure that you have planned for your finances properly before you deciding to contribute to the SRS account.
There are specific circumstances where you are allowed to withdraw your money from the SRS account before retirement age with no penalty charge. Here are some of the common types of withdrawal, table taken from IRAS.
Type of withdrawal
Amount subject to tax
5% penalty imposed?
Withdrawal on or after prescribed retirement age
50% of withdrawal sum
Withdrawal in the form of annuities
50% of annual stream
Withdrawal on medical ground
50% of withdrawal sum
Withdrawal in full on terminal illness
50% of full withdrawal sum less exemption*
In the event of bankruptcy
100% of withdrawal sum
Withdrawal in one lump sum by a foreigner (excluding PR)^
50% of lump sum
Early withdrawals before retirement age
100% of withdrawal sum
* From Year of Assessment 2016, a specified amount of SRS funds withdrawn in full on the grounds of terminal illness would be exempt from tax.
^ He/She must have maintained the SRS account for at least 10 years from the date of first contribution and have been a non-Singaporean for a continuous period of 10 years before date of withdrawal.
#2. Direct property investment is not allowed
Currently, IRAS does not provide a list of approved investment products. You will need to check with your SRS operator for the investment instruments that is allowed. Generally, there are not many restrictions on the use of money in the SRS account; you are free to invest in almost any instrument of your choice.
However, direct property investment is strictly not allowed. If you are planning to purchase a property in the near future, you should not open an SRS account.
#3. Potentially pay more tax on withdrawal
The last but the most important point to take note is that you may end up paying more tax if you contribute to your SRS account at wrong time. The concept is pretty easy to comprehend but the calculation is tedious and complex.
It goes like this. If you contribute to your SRS account at your early age, your SRS account will grow to a big amount when you are retired. You will receive tax saving benefit from your contribution to SRS account.
However, during the withdrawal period after retirement, you may ended up withdrawing a large amount of money and hence be required to pay the correspondingly high income tax. Even though only 50% of the withdrawal amount is taxable, large sum withdrawals will still put you in an expensive tax bracket.
Therefore, even though the SRS can potentially allow you to save tax, the timing of when you should contribute to SRS account is critical. There is an optimum age when you will benefit the most for contributing to your SRS account. Generally, the optimum age will be around 40-45 years old.
Do note however, that this optimum age vary from person to person. The following factors will affect your optimum age:
- Your age
- Your estimated income growth rate
- Your income tax bracket
- Your estimated investment return
- Your estimated inflation rate
To compute the optimum age is rather difficult, I have developed a calculator just for that. You can download my calculators below.
The Supplementary Retirement Scheme (SRS) will definitely provide you tax saving benefit. However, it is crucial to know when you should contribute to your account. If not, you might end up paying more tax in the future.
Lastly, you may like to consider the investment options after you have deposited money into your SRS account. Since most cash balance account offer scant interest rates which would not be sufficient to meet the inflation rate.
You definitely would not want your money to lose its value due to inflation after holding it for considerable period.
We hope you find this guide informative, do share it with you friends!
Louis Koay is a dual-licensed representative at a top financial firm. He graduated from the National University of Singapore with First Class Honours and he is a CFA charterholder as well as a Certified Financial Planner. He is currently managing a team of 6 advisors and servicing more than 1,000 clients with asset under advisory of more than $20 million. As a trainer at Dr Wealth, Louis developed the Personal Finance Mastery Course and he is a key trainer in the Intelligent Investors Immersive Program. He has trained more than 10,000 retail investors in analysing stocks and on personal financial planning.