SINGAPORE'S Supplementary Retirement Scheme (SRS) is a deferred tax scheme that allows those working in Singapore to enjoy tax savings, while actively building a retirement nest-egg.
Unlike the Central Provident Fund (CPF) scheme, the SRS scheme is voluntary. There is the option of participating in the SRS scheme, and contributing cash annually, subject to a cap. According to the Ministry of Finance, for 2007, the SRS contribution cap for a Singaporean or a Singapore permanent resident is $11,475, while the cap for a foreigner is $26,775.
The SRS scheme has grown in popularity, given the growing awareness about the importance of retirement planning in Singapore. In December 2001, there were only 11,890 SRS account holders. However, by December 2006, this number had swelled to 35,762 (see table). Further proof of the enormous success of the SRS scheme comes from the total SRS contributions, which grew seven-fold, from $157 million to $1.17 billion, in the five years between December 2001 and December 2006.
Each dollar contributed to one's SRS account will reduce one's taxable income for the year by a dollar.
The SRS scheme is meant to complement the CPF scheme, and help Singaporeans build up a retirement nest-egg. To encourage more Singaporeans to make voluntary contributions to their SRS accounts, the government offers tax benefits. Contributions to SRS are eligible for tax relief, and only 50 per cent of the withdrawals from SRS are taxable at retirement. SRS funds can be withdrawn over a 10-year period from statutory retirement age - which is currently 62.
The tax savings under the SRS scheme are relatively straightforward. For every dollar contributed to the SRS scheme, one can claim equal tax relief. Each dollar one contributes to one's SRS account will reduce one's taxable income for the year by a dollar. The only thing to remember is to make SRS contributions by Dec 31 in order to claim tax relief for income earned in that year.
As SRS funds are intended for retirement, those making contributions can consider investing their funds with a long-term view.
SRS funds can be invested in a wide variety of instruments, including unit trusts, insurance plans, bonds, shares and Singapore dollar fixed deposit. However, direct property investments are prohibited.
Interestingly, a growing proportion of SRS savings is being put to harder work through investments. As can be seen from the table, in December 2001, the bulk of SRS savings was held as idle cash balances. However, the proportion held as cash balances has been falling steadily and was only 22 per cent as of December 2006.
Tax concessions
Only 50 per cent of SRS withdrawals made after the statutory retirement age are considered taxable income. If the amount one chooses to withdraw each year is below a certain income bracket, one can even avoid paying income tax for the year. To minimise income taxes, retirees can make SRS withdrawals over an extended period of up to 10 years. With lower or nominal income at retirement, one may end up paying little or no income tax if withdrawals are staggered over a number of years.
While SRS funds can be withdrawn any time, there will be a 5 per cent penalty fee if the withdrawal is made before the statutory retirement age. In addition, 100 percent of the sum withdrawn will be considered taxable income, and taxed accordingly.
However, there are exceptional circumstances where one can still enjoy the 50 per cent tax concession when withdrawing one's SRS funds before reaching the statutory retirement age. The 50 per cent tax concession would still apply where the account holder has suffered permanent physical or mental incapacitation. A foreigner, who has maintained his SRS account for at least 10 years from the date of his first contribution, is also eligible to withdraw his entire SRS balance, and still enjoy the 50 per cent tax concession.
If you have not opened an SRS account yet, you can do so with OCBC Bank. Remember that you'll need to make your SRS contribution by Dec 31 if you want to enjoy tax savings for income earned this year.
To some of us, the amount that we can contribute to our SRS accounts may not seem large for a Singaporean or a Singapore Permanent Resident ($11,475) or for a foreigner ($26,775). However, if you contribute systematically over a prolonged period and make sound invest decisions, you will not only enjoy income tax savings, but you will also benefit as you could build up a sizeable nest egg for your golden years.
The writer is a manager with Group Wealth Management, OCBC Bank. The information does not take into account the specific investment objectives, tax position or the needs of any particular person.
