The Must-knows Of Supplementary Retirement Scheme

The Must-knows Of Supplementary Retirement Scheme

The Supplementary Retirement Scheme (SRS) is a voluntary scheme to encourage individuals to save for retirement. Contributions to SRS are eligible for tax relief, subject to the maximum tax relief of $80,000 and an annual maximum contribution of $15,300 for Singaporeans and Singapore Permanent Residents and $35,700 for foreigners. With guidance from your economics tutor in economics tuition, discuss why the Singapore government introduces such a scheme on top of CPF. Qualified individuals must open an SRS account with one of the three local banks, DBS, OCBC or UOB. Savings in their SRS accounts are entitled to a 0.05 per cent annual return. However, individuals can use their SRS savings to invest in various products and their investment returns are not subject to tax before withdrawal. Upon withdrawal after retirement age, 50 per cent of their withdrawals are taxable.

The Benefit of SRS

The tax relief you can receive with this scheme varies from individuals to individuals, depending on their personal income tax brackets. To learn the definition of tax relief, you may sign up for economics tuition Singapore with a reputable economics tutor Singapore. Economics Cafe Learning Centre is the best economics tuition centre Singapore. Founded by its principal economics tutor Mr Edmund Quek, it is conveniently located within 5 minutes’ walk from the Bishan MRT Station. If your tax bracket is 22 per cent (the highest rate) and you contribute $10,000 to your SRS account by 31 December 2019, your personal income tax for 2019 can be reduced by $2,200. In contrast, if your tax bracket is 2 per cent (the lowest rate) and you contribute $10,000 to your SRS account by 31 December 2019, your personal income tax for 2019 can be reduced by $200 only. It is obvious that the higher your personal income, the higher tax relief you can receive with this deferred tax payment scheme. In consultation with your economics tutor in your economics tuition class, list three other deferred tax payment schemes offered by Singapore and other countries in the world.

For high income earners, the one-time tax relief seems attractive. However, with the annual return as low as 0.05 per cent for SRS savings, the benefit, if spread out over a long period of time, may not be attractive. For example, if a 40-year-old man who is subject to the highest tax rate of 22 per cent places a sum in his SRS account and leaves the fund idling in the account for the next 22 years, the seemingly high one-time relief of 22 per cent becomes only 1 per cent per annum for the period of 22 years. This is even lower than the return generated from the fixed deposits, given that fixed deposits offer compound interest rate while the calculated return from your SRS savings is based on flat interest rate. Therefore, it does not make sense to leave your SRS funds idling. You may discuss with your economics tutor in economics tuition to give another example of a tax payer subject to the lowest tax rate of 2 per cent.

Investment Products Available

According to a Straits Times article, of close to $6 billion SRS funds in 2015, 32 per cent was lying idle as cash while the remaining 68 per cent was invested to generate returns higher than 0.05 per cent deposit return.  Besides the various investment products offered by the three local banks, there are a wide range of other financial products approved under the SRS scheme. They include Fixed Deposits, Bonds, Single Premium Insurance, Unit Trusts, Index Funds and ETFs, Shares, Real Estate Investment Trusts (REITs). Please compare the costs and benefits of these financial products in discussion with your economics tutor in your economics tuition class. With a long investment time horizon, you should be able to generate good returns with manageable risks.

Your investment gains are not subject to tax before withdrawals. At retirement, you can withdraw up to $40,000 a year without paying any tax if you do not have other sources of taxable income. This is because only 50 per cent of your withdrawals from SRS account is taxable and the first $20,000 of your personal income is tax free.

Linda Geng

Click to Read Next Post

economics tuition, back to homepage

Economics Tuition Singapore @ Economics Cafe
Principal Economics Tutor: Mr. Edmund Quek