Read This Before Using SRS to Save Tax – Part 1: How Does it Work?

Tap here for Part 2

Supplementary Retirement Scheme (SRS) is a voluntary scheme to save for retirement. It helps you to save tax with a few caveats, and since it’s December now I thought it’d be helpful to go through SRS before the year ends. For those who are unfamiliar with the scheme, I’ll run through how it works first before going into the pros and cons of it.

Opening an account

You can choose to open an account with one of the three operators (DBS, OCBC, or UOB), and contribute any amount at any time as long as you are within the contribution limit for the year. There really isn’t much difference between the operators as far as I can tell, so you could just pick one you’re familiar with. They do sometimes compete on promos, so that’s something you might want to shop around for.

Do open your account soon as retirement age is increasing each year until it hits 65; learn more about that here.

Contribution and benefit

The current contribution limit is S$15,300 within a year for Singaporeans and permanent residents, and S$35,700 for foreigners. Every dollar contributed to your SRS gets you a dollar of tax relief for that year.

For someone earning S$100,000 of income in the 11.5% bracket, contributing the maximum of S$15,300 saves them a good S$1,759.50 of income tax. That’s a significant amount of savings which only increases if your income falls in even higher tax brackets.

Withdrawals

The “catch” of SRS is that withdrawals before retirement age are subject to a 5% penalty. The amounts withdrawn will also be taxed at the prevailing tax rate. This means that someone who withdraws S$10,000 will only get S$9,500, and the S$10,000 withdrawn is also added to their chargeable income and subject to income tax. SRS is after all meant to help individuals save for retirement, so withdrawals before that are highly discouraged.

Those who start withdrawing when they reach their statutory retirement age, however, can enjoy significant tax savings. Amounts withdrawn after one’s statutory retirement age is subject to lower tax as only 50% will be considered chargeable income.

You can also spread the withdrawals over a 10-year period to maximise your tax savings. The magic number to withdraw each year is S$40,000 a year because 50% of that amount is S$20,000, and assuming you have no other income during retirement, this amount is completely tax free. Given that our income tax structure is progressive, amounts higher than S$40,000 per year still make sense since the tax rates are relatively low at the first couple of brackets or so.

Investment choices

The SRS account, regardless of which bank you open it with, offers a paltry 0.05% p.a. interest on funds you place inside, so you should definitely put your SRS money to work. There is little point in saving on tax if your money is withering away due to inflation.

There are restrictions to the investments you can make – no cryptocurrency or meme stocks to be bought here – but I feel that restrictions sometimes save us from ourselves.

You can invest SRS money in the following:

• endowment insurance
• locally listed stocks/bonds
• unit trusts
• Singapore government bonds (SGS bonds, SSB, t-bills)
• fixed deposits
• roboadvisers

I personally put my SRS savings in SSBs while investing a monthly amount via Endowus. I’ll probably talk about my SRS investment strategy separately, but I use Endowus owing to its relatively low fees and investment philosophy which I’m happy with right now. This isn’t sponsored, but we both get some fee rebates if you sign up through my link.

Cut-off for 2022

Based on what I can find from their websites, the following is the latest you need to contribute funds into your SRS to qualify for tax relief this year (i.e. Year of Assessment 2023). Do confirm with your bank, or simply don’t wait till the last minute:

Bank	Last Day to Contribute for YA2023	Timing
DBS	31st December 2022	7.00PM
OCBC	31st December 2022	9.00PM
UOB	31st December 2022	Not specified

Account opening should be instant, or at least that’s what I experienced with DBS.

Conclusion

The gist of SRS is this: contribute to save on taxes now while you should be more financially productive, invest the SRS sums over a long-time period, then withdraw from this account and pay less or even no tax during your retirement.

Personally, I feel that people in the lower tax brackets should probably conserve their liquidity instead of contributing to SRS, especially since the tax savings are quite low. Those in the 7% tax bracket, however, can start calculating whether it’s worthy to contribute to SRS, while those in the brackets of 11.5% and above should strongly consider doing so.

There are some criticism of SRS which I addressed in the video above, but if you want a written article on that do stay subscribed to the Telegram group.

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