Read This Before Using SRS to Save Tax – Part 2: Criticisms of SRS Addressed

I really like Supplementary Retirement Scheme (SRS) – and you can learn all about it here – but as with most things in life, it has its share of criticism. Are its supposed downsides really bad though?

Criticism 1: Limited range of investments

One of the criticisms of SRS is that it has a limited selection of permitted instruments you can invest your SRS funds in. Unlike cash in your bank account which you can use to invest in practically anything from cryptocurrency to your friend’s revolutionary cafe idea, SRS money can only be invested in:

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

Lack of choice can often save us from ourselves, and I think that is indeed the case here when it comes to investing for retirement. Cryptocurrency may well be the future, and your friend might just be the next big thing in coffee and toast, but is there a need to take such levels of risk when it comes to saving for retirement?

A longstanding downside of the limited investment choices is that the list is slanted too heavily towards local investment. This is indeed an issue as investing too heavily in Singapore can be rather problematic, but it is alleviated significantly by the advent of roboadvisers that accept SRS as a source of funding.

Typically offering globally diversified funds with relatively low fees, roboadvisers are all I – and in my opinion, the vast majority of working folks – need for our SRS investment. Well, that and Singapore Savings Bonds and t-bills since interest rates have been quite delicious of late.

I’ll elaborate more on my SRS strategy soon, so stay subscribed to my Telegram to receive updates on that.


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Criticism 2: SRS is not suitable for people who wish to retire early

Another reason I’ve heard as to why some prefer not to contribute to SRS is that they wish to retire early, and SRS only allows you to withdraw at your statutory retirement age (62 for those who started their accounts before 1st July 2022; 63 and set to increase further for those who open after that).

I find this puzzling for a few reasons as people who hold this view seem to speak of SRS funds as if they were in prison (or CPF); heavily locked and chained with no hope of early release.

This is quite far from the truth as you can withdraw your SRS savings anytime – albeit with a 5% penalty and the full amount subject to tax at the point of withdrawal. This may sound devastatingly bad, but it isn’t really if you consider the following use case:

Someone with a chargeable income of S$100,000 (11.5% tax bracket) contributes S$10,000 to SRS and saves S$1,150 of tax.

They decide to retire at age 35 to travel the work and their income would be zero at that time. Withdrawal of that S$10,000 would cost them $500 in penalty, and 0% tax since they do not have an income.

The tax savings of S$1,150 is not only larger than the penalty of S$500, it is also in today’s dollars with more time value.

Even if the person has a little income then, our progressive tax system means that they are likely to pay overall less tax than they save. And if their income is higher, they should really leave their SRS aside for later.

Criticism 3: investing with SRS funds creates a “capital gains tax”

In Singapore, there is no capital gains tax, so when we invest and our money grows, the profits are not taxable. Investments made with SRS, however, do incur some sort of capital gains tax.

Investment profits within the SRS aren’t really taxed, but we have to remember that SRS money is taxed upon withdrawal, so there is indeed some form of tax on our SRS investment returns.

If we make an annual SRS contribution of S$15,300 dutifully for 25 years, it’ll result in a capital of S$382,500. Given a 7% tax rate, we would have saved S$26,775 over these years.

Assuming the investment grows to S$800,000, S$400,000 of it is taxable, and it’s apparent that we are taxed on more than our capital, which means some of our investment gains are indeed taxed.

However, if we follow a tax-efficient strategy and draw down S$80,000 a year from it, we pay S$550 of tax each year under current tax rates. That’s a total of S$5,500.

Not only do the tax savings outweigh the “capital gains tax”, you also save on tax upfront and pay later, benefiting from the time value of money.


Are you going to contribute to SRS? Or do you have more issues with the scheme? Let us know in the comments or Telegram!

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