Saturday, December 18, 2010

Saving for your retirement

Business Times: Sat, Dec 18
THE Supplementary Retirement Scheme (SRS), which was launched here in April 2001, is gaining traction with taxpayers, judging from the latest statistics from the Ministry of Finance (see Table 1). According to the data, 7,214 SRS accounts were open...
THE Supplementary Retirement Scheme (SRS), which was launched here in April 2001, is gaining traction with taxpayers, judging from the latest statistics from the Ministry of Finance (see Table 1).

According to the data, 7,214 SRS accounts were opened last year, 41 per cent more than the 5,108 accounts opened in 2008.

Although the total number of SRS account holders, which stood at 53,656 at the end of last year, is still small compared to just over one million individual taxpayers, the number of SRS accounts have increased nearly five-fold in the last eight years, while total contributions have grown almost 13-fold to $2.05 billion over the same period.

One reason for SRS's growing popularity is the scheme's tax benefits, which can accord higher income earners with significant tax savings.

Under SRS, individuals can open an account at any SRS agent bank, including any OCBC Bank branch. Voluntary cash contributions to the account are eligible for tax relief. However, for the contributions to be automatically included in the income tax return for the current year (to be filed by mid-April 2011), all contributions to the SRS account must be made before the end of this year.

This means that those who are eligible need to act soon, before they miss the deadline.

SRS revisited

Under the scheme, Singaporeans, Singapore permanent residents (PRs) or foreigners who receive any form of income (eg employment income including directors' fees, trade income, rental income or other passive income) and are above 21 years of age, may contribute to a SRS account. The contributions must be made in cash.

Any amount can be contributed, provided that it does not exceed the maximum SRS contributions (see Table 2).

Once a foreigner becomes a Singaporean or PR, he should inform the SRS operator to have his maximum contribution amount recalculated if he has made contributions for that year, as otherwise he may be penalised for exceeding the limit.

SRS can offer a steady income stream on retirement

Aside from the tax benefits, the primary aim of the scheme is to encourage individuals to save in a disciplined manner for their retirement.

Making voluntary contributions to the SRS is a disciplined way of building a pool of retirement funds. Getting into the discipline early is important if one is concerned about having enough retirement income during the golden years in place of an employment income. SRS savings can be withdrawn (without any penalty) upon reaching the prevailing statutory retirement age at the time of the first SRS contribution. The statutory retirement age is currently at 62 years.

Retirees looking for a regular income stream can spread their SRS withdrawals over 10 years, effectively lowering the amount which would be subject to tax assessment - only 50 per cent of the sum withdrawn will be subject to income tax.

If the amount withdrawn annually is low, it may not even be subject to taxes. Hence, the scheme is designed to encourage gradual withdrawals in the golden years, with the benefit of a steady income stream.

Make your SRS funds work harder for you

Investors can put their SRS funds to harder work by investing them in a range of financial products to earn better returns. This includes fixed deposits, structured deposits, insurance products, shares, bonds, real estate investment trusts (Reits), exchange traded funds (ETFs) and unit trusts.

Investments that are barred include physical property. For life insurance products, only single premium plans with life cover of not more than three times the single premium are allowed. Critical illness, healthcare and long-term care products are excluded from this scheme.

However, all proceeds from the realisation of SRS investments must be returned to the SRS account, as the objective of the scheme is to enable individuals to realise their desired retirement lifestyle.

Do a simple cost-benefit analysis before taking the plunge

Before saving under the SRS scheme, it is advisable to do a simple cost-benefit analysis to review the potential tax benefits as well as earnings from investing SRS funds. This should be weighed against the opportunity cost of tying down the funds till retirement age. There is a chance that if SRS savings are withdrawn in its entirety upon retirement, individuals will end up paying more income tax on the withdrawals than what was gained in tax savings. However, this may be mitigated by staggering withdrawals over a period of 10 years.


An SRS account can be opened online or at any participating bank branch.

•The writer is vice-president, Wealth Management Singapore, OCBC Bank

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