Is the CPF Supplementary Retirement Scheme (SRS) Worth Using?

The main benefit of using the CPF Supplementary Retirement Scheme (SRS) is that it lowers your taxes. But is it the best retirement savings option for you?

The Supplementary Retirement Scheme (SRS) is an optional tool to help Singaporeans save for retirement. The main appeal of SRS is that it lowers your taxes.

But with so many different retirement savings options like the CPF Special Account, is it really the best place to park your money? Here’s what you should know before using it.

How Exactly Does the Supplementary Retirement Scheme Help?

There are two ways that SRS helps you. The first is by lowering your taxable income when you make voluntary contributions. The second is by lowering your taxable income when it comes time to make withdrawals, at the retirement age of 62.

To understand how this works, you need to know that Singapore’s income taxes are based on a tiered system. You can check it out here.

Now, when you contribute to SRS, your income is considered to be lower by the amount you contribute.

For example, say you are earning S$54,000 per annum. Under the tax system, you would pay 3.5% on the first S$40,000 of your earnings (S$550), and then 7% on the remaining S$14,000 (S$980), for a total of S$1,530*.

However, say you contribute S$1,000 a month to SRS, or S$12,000 a year. In this case, your earnings would be reduced by the contributions, and you would count as earning just S$42,000 per annum. In this case, the tax would be 3.5% of the first S$40,000 of your earnings (S$550), and 7% on the subsequent S$2,000 (S$140), thus making your tax amount S$690 instead of S$1,530.

This saves you around S$840 per year or S$70 per month.

There’s Another Bonus When You Withdraw the Money

From the age of 62, you can withdraw the money from your SRS. When you do so, you count as withdrawing half the amount you actually do.

For example, say you withdraw S$40,000 per annum from your SRS account. This would normally be subject to a tax of S$550 (see above, regarding taxable income). However, because the money is from the SRS scheme, you would count as withdrawing just half the actual amount (S$20,000). This means you would pay nothing, as there is no tax on income of S$20,000 or less per annum.

As more money is involved, the savings grow more significant. For example, say you are quite affluent, and will be able to withdraw S$84,000 per annum after retirement. You would pay:

3.5% of the first S$40,000 (S$550)

7% of the next S$20,000 (S$2,800)

11.5% of the next S$4,000 (S$460)

That’s a total of S$3,810 per annum.

However, under the SRS scheme, your withdrawal of S$84,000 would count only as a withdrawal of S$42,000 per annum. We’ve already worked out the tax for this amount (see above), it’s S$690.

This is a difference of S$3,120, a much bigger difference than between S$550 and S$0. As you can see, the further up the tax bracket you go, the more significant the savings from SRS becomes.

*This does not take into account any personal tax relief or tax deductions you may have. Check with IRAS on what sort of reliefs you qualify for.

There’s a Catch to Putting Money in SRS

Once you put money in SRS, it’s stuck there until your retirement age. If you try and take the money out earlier, you will be penalised by 5% of the amount withdrawn. In addition, you will pay the full taxes for the received income.

This means SRS lacks the flexibility of other investments, such as Singapore Savings Bonds (you can cash out at any month), unit trusts funds (you can sell within a few days), and even fixed deposit bank accounts (the penalties are not as steep for withdrawing early).

There Are Other Things You Can Do with SRS

The money in your SRS can be invested, in assets such as approved bonds, stocks, insurance policies, and funds. You don’t need to keep the money stagnant. However, there are two problems with this:

The first is that you won’t get a top-up, should your investments lose money. It’s down to you to manage your own portfolio.

The second problem is that you don’t get the money you make right away. The returns go back into your SRS account, where they remain locked until your retirement.

Should You Save Your Money in SRS?

The richer you are, the more worthwhile SRS becomes. If you are earning just S$30,000 per annum, for example, there’s nothing that SRS will do for you - you already don’t pay taxes, and you’re probably not in a position to risk locking up your money for the next 20 or 30 years.

Likewise, if you would withdraw only S$40,000 a month at retirement, it’s hard to justify using SRS. Committing your money for 20 or 30 years, just to eventually save S$550 a year, doesn’t seem like a great deal; you could be better off investing the money in more flexible assets.

SRS could be an interesting alternative to wealthier Singaporeans, who are earning amounts such as S$80,000 per annum or above. Speak to your financial adviser for more details.

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