Maximizing your Retirement Savings with SRS Tax Relief

The wealthy have ways to reduce as little income tax as possible, be it by hiring a tax accountant, asset-based lending, etc. But what about the mass affluent people?

Is there a way to pay lesser taxes and grow your wealth simultaneously? Yes!

One of the easiest ways is to contribute to your SRS (Supplementary Retirement Scheme) account to save tax and exploit the option to invest the fund over the long horizon. However, if you are highly risk-averse, you can continue earning the interest of 0.05% p.a.. offered by the SRS account.

A quick recap of SRS

1. SRS is part of Singapore’s government’s multi-pronged strategy to address the financial needs of the greying population by helping Singaporeans save for their old age. SRS is a retirement savings account you can voluntarily open at DBS/POSB, OCBC or UOB bank.

2. The SRS complements the Central Provident Fund (CPF). CPF savings are meant to provide for housing, medical, and basic living needs after retirement. Unlike the CPF scheme, participation in SRS is voluntary. At their discretion, SRS members can contribute a varying amount to SRS (subject to a cap). The contributions may be used for investment to gain potential higher returns.

3. SRS contributions are eligible for tax relief. So, if you contribute to your SRS account by 31 Dec 2023, you can get tax relief in the year of Assessment 2023 (which is filed by IRAS and paid by you in 2024). You get a dollar-for-dollar tax relief on your SRS contributions, which reduces your chargeable income.

4. Singaporeans and PRs can only contribute a max of $15,300 to the SRS bank account. For foreigners, the maximum yearly contribution is $35,700.

5. Unlike CPF, which only allows you to deposit and not withdraw funds, you can withdraw your SRS account’s funds whenever you want (you’ll be taxed on the withdrawn amount). However, this is not without negative consequences. Early withdrawal (i.e., before retirement age) subjects you to a 5% penalty, and you’ll also be taxed on any amounts withdrawn before retirement. It is discouraged to withdraw the funds before retirement age unless it’s for emergencies.

Resident Tax Rates from the Year 2024 onwards

Illustration of Tax Rate: If a Singaporean earns an annual income of $120,000 annually, you must pay about $7,950 in income tax. However, if you chose to contribute $15,000 into the SRS account for that year, you would have lowered your chargeable income by $15,000 to $105,000. Hence, you only need to pay $6,225 in income tax [3,350 + (25,000 * 0.115)]. From $7,950 to $6,225, that is $1,725 in tax savings, roughly 28% lower than you used to pay.

OUR VIEWS

There are several ways to maximise the utility of your SRS account, ultimately benefiting the individual for retirement.

The funds in the SRS account can be invested in the following;

1. Insurance Products

2. Unit Trusts

3. Index Funds

4. Blue Chip Shares

5. SGD Fixed Deposits

6. Singapore Savings Bonds

We should view the SRS account as an investment portfolio. Should you invest in your SRS fund, the investment should spread across all or part of the above investment vehicles to hedge against market risks.

To conclude, SRS allows you to have tax relief and money for retirement. Remember that you must invest the money in the SRS account; otherwise, inflation will erode the value with time.

It is wise to contact your trusted Financial Adviser for more information to make your SRS work harder. Alternatively, you can send us an enquiry, and we will contact you shortly.

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This article is for informational and educational use only and is not a recommendation or endorsement of any particular investment or investment strategy. Investment information in this content is general, strictly for illustrative purposes, and may not be appropriate for all readers. It is provided without respect to individual readers' financial sophistication, financial situation, investment objectives, investing time horizon, or risk tolerance. You should consider the appropriateness of this information regarding your relevant personal circumstances before making any investment decisions. Past investment performance does not indicate or guarantee future success. Returns will vary, and all investments carry risks, including loss of principal.