Wednesday, December 2, 2009

Supplementary Retirement Scheme (SRS)

Do you know that with Supplementary Retirement Scheme (SRS) you can:
1) claim tax relief of all the contributions made (with a cap of $11,475 for Singaporeans and Permanent Residents)
2) buy investment as well as insurance products.

Assuming you are earning $85k/annum. Based on the table you'll be charged with 14% interest. If you just put $1,000 for SRS, you would have save $140 of tax.
Maybe every month you can save $1,000/month for your retirement, in a year you would accumulate to $12,000. With this $12,000, you would have save $1,680!! - this is what we call tax free :)

Another example would be assuming you earn $50k and you can save only $500/month. This will translate to $510 tax savings!
- Based on 8.5% tax rate for $50k and $6,000 invested in SRS

This is the income tax rate for Singapore for YA2009 (since YA 2007):
Chargeable IncomeRate (%)Gross Tax Payable ($)
First $20,000
Next $10,000
First $30,000
Next $10,000
First $40,000
Next $40,000
First $80,000
Next $80,000
First $160,000
Next $160,000
First $320,000
Above $320,000

Of course there's a downside on this where the retirement fund can only be withdraw when you reach your retirement age or pay a 'fine' of 5% + current income tax.

Well, you can look at it if you really need the money, might be due to you are not working, well you can just withdraw it and get 'fine' for the 5%. Since you are not working, you will not have much money to be tax, so basically it's tax free :)

E.g. Taking the example above, you have deposited $12k to SRS when you are earning $85k/annum. Then on the following year, you only work for 2 months. So the total of your pay would be about $14k ($85k/12mths*2mths). You can then withdraw the $12k. You be then fine with 5% of $12k = $600. And your current taxable amount would be $26k ($14k salary + $12k SRS). For 26k, you are taxed $210 (based on the table above). So the amount of money you need to pay is $600 + $210 = $810.
But you have saved $1,680 previously, thus you still gain by $870!!
In conclusion, there's no fine :)
- subject to scenario mentioned where your yearly income has dropped drastically.

1. The main benefit is of course Tax Relief.
If you are in 14% tax bracket, you will save 14% instantly.
This guaranteed return is much higher than any investment available in, say 1 week (if you deposit SRS during last week of December every year)!
If you put in $5,000 in last week of December, you'll save $700, just like that.

2. Flexibility of contribution.
As illustrate above, you can just contribute during the last week of the year.
And for the rest of the 51 weeks, you can use it to invest in other products.

3. Force you to save for retirement.
As they say, the earlier you save the better. Thus SRS is killing 2 birds with one stone by forcing you to save as well as giving you the tax relief.

4. Withdrawal for foreigner is 10 years.
If you are a foreigner, wait no longer. Just put some money in your SRS first. Then 10 years from the first contribution, you can withdraw it; unlike local where you have to wait till retirement age (62 as of 2009).

5. Others:
- You can invest your SRS (buy funds/index since you need to wait till retirement as study has shown that investing on SG/US index for more than 10years, it has never loose money before).
- Flexibility in withdrawal - either one lum sum or up to 10 years.

1. Penalty of 5% for early withdrawal.
Well if your investment returns is more than 5%, then this penalty is irrelevant (you just get lesser return in your money).

2. Taxable income of 50% for withdrawal.
By then, your declared income might not be as high as during your working years. And you can spread up to 10years for withdrawal.

Pros & Cons
1. Government increase/decrease the tax at the time of your withdrawal
You'll be glad that from 2003 onwards, the rate has been dropping:

You can check out the official details from the MOF here:

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