Monday 28 November 2011

Supplementary Retirement Scheme (SRS) - Reap the benefits

Little-known savings plan for retirement
Put money into an SRS account and you can reap attractive income tax savings and investment returns
By Goh Eng Yeow, The Sunday Times, 27 Nov 2011

Watching my parents grow old and sick with a host of ailments can be heartbreaking.

Even with the help of a full-time maid to take care of the household tasks, caring for them is a heavy chore as I balance a full-time job and other responsibilities.

Still, in a sense, they are lucky. As a generation which grew up and got married just after the Second World War when starting big families was common, they could always count on at least one grown-up child to look after them.

That turned out to be their best life-insurance policy, so to speak - and a testimony to the virtues of having a big family.

But sadly, this may soon be a thing of the past. My generation - the so-called baby-boomers now in their 40s to early 60s - have far smaller families. Having one or two children is very common, and expecting them to take on the burden of caring for us when we grow old and infirm may be tough.

It is not that our children would not want to. Rather, the harsh economic realities may make it quite impossible for them to achieve giving the same level of care which I give my parents.

Even though those of my generation have been sandwiched with ageing parents and school-going children, our redeeming grace is that we were lucky enough to live through an extraordinary period of the past 20 years when the Singapore economy was growing from strength to strength.

And even though our wages might have been quite modest, big-ticket items like flats were still fairly affordable. In fact, for many of us who bought HDB flats 15 to 20 years ago, paying off our mortgage using our Central Provident Fund savings took 10 years or less.

But it is different for those now embarking on their working careers. With even a resale four-room HDB flat costing $400,000 or more, it may take a young working couple decades to pay off their housing loan.

With other commitments that come with starting a family, it is unlikely that they would have much spare cash left over to take care of their aged parents.

Singaporeans are living longer than before, and the remaining CPF savings they have, after paying off their home mortgages, may be insufficient to tide them through their retirement years.

And looking at the escalating bills chalked up by my parents on medical care and items such as adult diapers which have become daily necessities, it is better to have a sum handy during those years when we need it most - especially when the generation after us may ill-afford to take care of us.

One way to do it is to set aside a sum every year to be invested wisely in an asset which produces a regular source of income. This will ensure that the spring does not run dry during the autumnal part of your life.

It is never too late to start saving, even for those who are now in their 50s and may have only a few working years left.

For the past four years, I have been promoting a little-known savings programme known as the supplementary retirement scheme (SRS).

This is a scheme established in 2001 to complement CPF which aims to encourage people to save for their retirements.

What the SRS offers as an incentive is the tax savings which a saver gets from the money he puts away into an SRS account.

This offers him a decent risk-free return on the first year of his savings - a sum not to sneeze at, considering that banks such as POSB pay a paltry 0.05 per cent interest on deposits.

In previous years, a saver could put up to only $11,475 into his SRS account which can be opened at DBS Bank, OCBC Bank or United Overseas Bank. But from this year, the ceiling has been raised to $12,750. In other words, you can save more and enjoy a bigger tax saving.

As a recent brochure from OCBC Bank illustrates, if a person has an assessable income of $60,000, he will have to pay $1,320 in taxes, after deducting his CPF contributions and other tax reliefs.

But if he puts $12,750 into his SRS account, his tax bill only comes up to $489 and he enjoys a tax savings of $831. That works out to be a 6.5 per cent return on the sum put into the SRS account.

After 10 years, he will reap a considerable saving of $8,310 on his income tax and that is not including any interest or investment returns he might have earned on his SRS savings.

And when he reaches the mandatory retirement age - now fixed at 62 - he can withdraw up to $40,000 tax-free from his SRS account a year over a period of 10 years.

Of course, there are those who gripe that if a saver withdraws part of his SRS savings before retirement, he will be hit with a 5 per cent penalty charge. The sum withdrawn would also be treated as part of his taxable income for that year.

Surely, this smacks of a capital gains tax, they argue.

But such arguments detract from the original good intention of the scheme, and that is to get people to save for their retirement. Surely, if they are allowed to take out SRS monies without suffering a penalty, it may discourage long-term savings and defeat the purpose of the scheme.

For those with SRS accounts, my advice to them is to use the savings to buy into the STI exchange traded fund (ETF), which is listed on the Singapore Exchange, on a regular basis. They can buy the ETF via their online stockbroking accounts or through a broker.

This will offer them exposure to a basket of blue chips such as DBS Group Holdings, United Overseas Bank, OCBC Bank, SingTel and Singapore Airlines which they may not be able to afford to buy on their own.

If the Singapore economy continues to prosper as it did in the past three decades, there is every reason to believe that the STI ETF will appreciate in value. It also offers a fairly attractive dividend yield of about 3 per cent.

Indeed, more Singaporeans are heeding the call to open SRS accounts. Government data shows that last year, the number of SRS account holders jumped by 10,328 to 63,984. This is 1.5 times more than the average number of 4,107 new accounts opened each year from 2007 to 2009.

If they persevere, as I do, in diligently putting money into their SRS accounts every year, it is likely that they will have a tidy sum squirrelled away by the time they retire, as well as a steady source of dividend income to rely on, if they invest wisely.

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