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Spend $1 to Open Your SRS Account to Fix Your SRS Withdrawal Age (And some real truth about the usefulness of the SRS account)

I never had an SRS Account until 3 years ago.

That was when I decide to create an SRS account. The process to create an SRS account is very easy currently.

As creating the account is easy, I do urge those of you who have not to create your SRS account to go ahead and create it to lock in the current statutory retirement age.

I will also share some of my thoughts about the usefulness of the SRS system for you plus a FREE Google Spreadsheet that you can use to see if it is a good idea to consider contributing to your SRS account.

What is the SRS Account and How is it USeful for You?

The SRS Account stands for Supplementary Retirement Scheme which is a voluntary scheme to encourage people to save for retirement. It is basically our private retirement plan, that supplement the government defined contribution plan, the CPF.

The short answer is that by channelling some of your money annually to your SRS account, you can defer your income tax so that your annual income tax payable can be lowered.

Let me explain.

When you contribute to your SRS account, you deferred paying taxes till the designated withdrawal time.

This contribution amount will be a deduction on your total income, to derive a lower taxable income.

During withdrawal time, which is after your statutory retirement age, only 50% of your withdrawal is subject to income tax. How much tax you will pay at withdrawal, will depend on your tax bracket. The idea is that when you retire, you should not earn any ordinary income, so the income tax that you pay on 50% of your withdrawal should be lower than the tax you pay on your current tax bracket.

The designated withdrawal time is tied to the current statutory retirement age. The statutory retirement age currently is 62 years old.

SRS account is not only available to Singaporeans, permanent residents but also foreigners. For foreigners, after 10 years, they can withdraw in one lump sum and 50% of the value is subjected to tax without penalty.

Thus for both Singaporeans & PR and foreigners, this is the second main way that they can use to reduce their taxable income. The main one, advocated by financial bloggers, is to transfer $7,000/yr to your CPF Special account and another $7,000 to your family member’s CPF Special account.

Currently, the maximum that you can contribute to your SRS is S$15,300/yr for Singaporeans and $35,700/yr for foreigners.

In terms of what you can purchase with your SRS account, you can purchase all sorts of financial assets from stocks, unit trust, even robo advisors, insurance savings plans, annuities.

Can you withdraw your money from your SRS before the statutory retirement age?

Yes, you can but…

If you withdraw before 62 years old, you have to pay a 5% penalty on your withdrawal, and the withdrawal is fully subjected to ordinary income tax. If you withdraw after the designated withdraw period, there will be no penalty.

You will have to withdraw finish your wealth within 10 years. If you purchase an annuity with your SRS, this 10-year restriction is not imposed on it.

Taking Action Today by Creating Our SRS Account to Hedge Our Withdrawal Age Risk

I never felt the need to open an SRS account because due to my income level, and the tax relief that I had in the past, the tax that I eventually pay is a very small percentage of my total income.

However, recently, I started to get very uneasy with the number of articles in the mainstream publications, and on TV regarding working longer, discussion on retirement and the retirement age.

I got a freaking feeling that they will extend the statutory retirement age.

When that happens, so will the penalty-free SRS withdrawal age.

So why not spend $1 to fix that penalty withdrawal age?

I did some research and seems that I cannot find any noticeable difference in the offering of UOB, OCBC and DBS.

So I just go with the easiest option which is to open an SRS account with DBS.

It is easiest because opening a lot of accounts with DBS is just a few clicking processes.

opening SRS account 1

If you navigate accordingly and follow the instructions, all it takes is to transfer $1 to open it.

I didn’t even bother that opening an account and transferring money will net you a cash reward. However, if you are interested in this stuff, here it is.

The Government Announced in March 2021 to Shift the Singapore Statutory Retirement Age from 62 years old to 63 years old.

Update: I think a fair number of readers was asking wouldn’t the statutory retirement age of 62 years old be shifted.

Well, the government earlier this year announced that the Singapore statutory retirement age will be shifted.

Raising the statutory retirement age to 63 and the re-employment age to 68 will go ahead as planned on July 1 next year, said Manpower Minister Josephine Teo on Wednesday.

Business Times

So by July 1st, 2022, the retirement age will be 63 years old.

If you create your SRS account by then, it is likely you can only start your penalty-free SRS withdrawal at 63 years old.

If we take reference from the Ministry of Finance SRS document, we can get some guidance on how the SRS is tied to the Singapore Statutory Retirement Age:

SRS Statutory Retirement Age 1
SRS Statutory Retirement Age 2

The above points were taken from the SRS document. Observe that a lot of the variables take reference from the statutory retirement age when you make your first SRS contribution.

Since opening an account is not so much effort, why not open one to give you some administrative flexibility next time?

Some of My Deeper Thoughts about SRS and Paying Taxes

At first, I just want to ensure that I can lock in that penalty-free withdrawal age, just in case I need it.

However, I thought about it, and I decide to do some quick calculations on my projected income tax for next year.

And then I realize maybe I should contribute to my SRS account.

When mom passed away, I lost some large tax deductions. When I ROD in 2017, I also lost some small tax deductions.

My tax deduction is quite bare.

That, together with higher total income, would mean that my taxable income will result in a big increase in my income tax expense.

So SRS became a viable consideration.

I really, really, really, really don’t like to have my money locked up. So that means no CPF SA top-ups and previously no SRS contribution.

Between the two of them, the SRS contribution is perhaps the lesser evil.

This is because you can withdraw SRS early and pay the 5% penalty but you cannot do that with your CPF.

I compute that there is a possibility that I could be unemployed in the future, and take an early withdrawal, and I won’t be taxed at an ordinary income level. The difference between the 5% penalty and my marginal income tax bracket is still worth it.

But in the end, in the grand scheme of things, perhaps I should just pay the increase in tax and be done with it.

I forecast this will be the highest total income I will have for some time, so perhaps this will be the last time I will pay at such an income bracket.

I am not going to make a big deal out of it as I am fortunate I can pay a higher tax because it would mean I earned more, while there are others who struggled to get employed.

Using SRS Account May Not be That Useful Mathematically if You Invest Your Money Decently

Some of the older folks who did the math tell me the SRS system is broken (which I will explain later)

But in truth the savings on taxes today, deferring the tax payment so that you will only be taxed 50% of what you have in the future, may not result in a significant difference.

Some of the more numbers focus people have worked this out.

In my Financial Independence Telegram Group, I have seen two discussions on this.

One of our members Lincoln created a Google Spreadsheet to compare the trade-off between putting your money in SRS versus if you just pay the taxes and investing the rest.

You can view Lincoln’s SRS Efficiency Calculator spreadsheet here. You can make a copy of the spreadsheet here.

Click to view a larger illustration

The right model to compare is to compare the final value of what you will have if you put your money in SRS and if you do not, at different milestones.

In this case, it measures:

  1. At the age of SRS Withdrawal
  2. 10 years after SRS Withdrawal

You can see there is a difference and if the difference is positive, there is some usefulness of using SRS versus not using SRS.

In the case study above, this 30-year-old is 32 years away from 62-years-old where he can take out his money. He is at the 20% income tax bracket, and he does not invest at all, so his rate of return is only 0.5%.

There is an improvement of $105,902 and $110,448 if he uses the SRS account versus if he does not.

Now, what if he invests with an expected rate of return at 7% and with some investment costs of about 0.7% a year?

If he invests at 7% a year with 0.7% cost

The value that he gets from using SRS is still higher than cash ($123,670, $80,620 respectively).

But respective to his portfolio value the amount is more insignificant.

But if you are in a lower tax bracket today, the savings, if you are an investor that is able to invest at a greater rate of return is lesser.

A person with 12% Effective Tax Rate and Invest

If a person invest, but his income tax is lesser than 13%, you can see that the difference is not a lot.

I tested that even if your rate of return is like 2-3% a year, there is not a lot of monetary advantage of using SRS.

So this is not because the rate of return is a high 7% but if your returns are decent, and you belong to a relatively lower tax bracket, the difference is minimal.

It might be beneficial not to defer the taxes.

Future has a lot of uncertainty but hopefully, the calculator can help you model the savings or lack of savings.

I should tell you that your future is uncertain. The eventual rate of return is uncertain, whether you continue to contribute every year is uncertain, the future income tax rate is also uncertain.

The SRS is a bit Broken

The math in the previous section will show that generally, we can say the tax deference and tax deduction works in our favour, but you lose a lot of the optionality of your wealth by semi-locking your money in SRS.

One of the main reasons it’s broken is because relatively speaking, our ordinary taxes paid in Singapore is relatively low, versus other countries.

In other countries, the effective taxes paid could be 20% upwards of your total income.

Unlike other countries, on a personal basis, we do not have

  1. long term equity capital gains taxes
  2. short term equity capital gains taxes
  3. taxes on dividends (unless from a partnership)
  4. taxes on interest income (unless from a partnership)

What this means is that if we build wealth through our normal cash, brokerage and investment accounts, there is no tax penalty to it.

We thus do not need to make use of private deferred contribution accounts such as the SRS to optimize our taxes. For example, in the USA, there are taxes on capital gains and dividends, thus optimization with traditional IRA, Roth IRA, 529, 401k, HSA and Roth 401k accounts is a must. Some of these accounts will lock your money till 59.5 years old. There is a whole discipline of Roth conversion ladders and contribution optimization that a wealth builder has to contend with.

Overall, we are already paying very low taxes relative to the net worth.

This is advantageous to individuals and families that are financially unfettered and conscientious.

If we look at the impact of the tax savings on three different groups of people, the lower-income, middle income and higher income:

  1. if the lower-income contributes to SRS, it will take up a large proportion of their annual income. It is a challenging way to save money and likely they won’t have that high of a tax burden as well
  2. the high income can contribute to SRS, and enjoy the tax savings. However, in the grand scheme of things, the tax savings during withdrawal versus after-tax withdrawal will be rather minute versus their net worth
  3. the middle income would enjoy this the most, but a lot will depend on the rate of return of the SRS portfolio, and your current tax bracket. I haven’t done the math, but in the grand scheme of things, it might matter much less than we think

If you have contributed or choose not to contribute to the SRS, do let me know your thought process and whether you have a different take on my personal situation.

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SalivaChan

Sunday 2nd of January 2022

Great insights, Kyith!

While the potential tax savings is always attractive, my biggest bugbear with SRS is the lack of effective good low-cost options available versus the usual cash investment accounts.

DFA funds come the closest imho, but even that comes with “access fees” which is a drag on returns.

Kyith

Tuesday 4th of January 2022

Hi SalivaChan, no choice that is the world we live in. I think there are those unit trust platform with no advisory or access fee. But you pay trailer charges. These are the Poems and Dollardex. For a long time, people use SRS to invest in individual stocks.

Chan Mali Chan

Monday 27th of December 2021

Not sure why one should assume that one can get a higher rate of return with cash vs SRS investments.

The SRS scheme is perfect for long term investments like index ETF. Just buy and keep till retirement and benefit from the tax savings. The aim of the scheme is certainly not for one to simply transfer and keep in cash to save on tax. As its name states, it is a retirement scheme meant to encourage long term investing for retirement.

It is a no brainer, especially at higher tax brackets.

Garudadri

Friday 31st of December 2021

@Kyith, Hi Nice discussion What happens if a foreigner contributes full 10 years and then withdraws after ten full years AFTER leaving SG? What will be the rate of taxation on the amount? Will tax apply to 50% of the corpus only ? Any idea? Thanks in advance

Kyith

Tuesday 28th of December 2021

One can get a higher rate of return in cash because the lowest cost investment in SRS, comes at a higher cost. It is not a no brainer because you have less flexibility with the money.

Ht

Tuesday 5th of March 2019

Can we do it via ocbc srs Application ? No difference right ?

Aud

Sunday 23rd of December 2018

Hi Kyith

It seems like there's a fall below fee of S$50 per month charged quarterly if your DBS SRS account has got less than S$200,000 in Deposits &/or Investments as your Month End Balance, unless I'm reading their T&Cs wrongly?

Kyith

Sunday 23rd of December 2018

Hi Aud,

It should not be so high. I understand the charges are waived. there are very little people with that amount in their SRS!

Sinkie

Friday 14th of December 2018

For those who haven't hit BHS, can also lower income tax by voluntary top up to Medisave.

SRS more useful for those earning annual $100K to maybe $250K. i.e. middle to upper middle income. Especially if no parenthood tax rebate or other large deductibles.

For higher income, let's say chargeable income of $400K --- maxing out SRS will only bring down income tax from $62,150 to $58,784. A drop of only 5.4% while his marginal tax bracket is already 22%.

And as you pointed out, such high income people will have much larger cash assets as compared to the relatively small SRS amounts.

Anyway most people leave SRS as cash or low interest FDs. Maybe some insurance endowment. The main purpose is merely to reduce immediate income taxes and just leave as long term cash savings.

But for your case, SRS may still be useful especially if you already have large portion of cash / safe bonds. Treat the SRS as warchest for stocks & long term holdings. You can rely on cash assets for nearer term liquidity needs.

As for official retirement age, S'pore is different from other countries with pensions as their pension start date ties in with the retirement age. CPF Withdrawal Age and CPF Drawdown Age both don't depend on retirement age.

I think S'pore will prefer to retain the retirement age at 62 --- it's more business friendly as it is cheaper to let go or retrench people after retirement age than before it --- less expectation of retrenchment package --- the "iron or aluminium handshake" specified in the Re-employment Act if not re-employed is much smaller than typical retrenchment packages.

S'pore already using tools like Re-employment Act to promote working longer. The CPF Drawdown Age will likely converge to the re-employability age which is currently 67.

In practical terms, the retirement age in S'pore is superfluous. If money no enough, also cannot stop working. There's also no state pension or unemployment benefits, so no difference if jobless before or after retirement age.

Kyith

Friday 14th of December 2018

Hi Sinkie, thanks for providing that perspective. I didn't think of the retirement age in that way, but too much noise have made me wary and I believe there might be some changes in the near future. But i like your last sentence. Retirement age in Singapore is superfluous.

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