Save money and pay less tax with Supplementary Retirement Scheme (SRS)

These are the plus points of taking part in Supplementary Retirement Scheme

By Aaron Low, The Straits Times, 14 Oct 2012

Retirement planning should be a key objective for working people but many Singaporeans seem to be tuning out.

Part of the problem is that we are so busy taking care of present needs that there is little time left over for future planning.

Insurer Aviva reported recently that while Singaporeans have higher levels of savings and investments compared with other investors in the region, Singaporeans are still worried about their retirement.

Aviva Singapore chief executive Nishit Majmudar explained that "decreasing interest rates and return on savings, as well as the increasing life span and cost of living, are reasons why planning for retirement is becoming very difficult".

This is partly why the little-known government-managed scheme called the Supplementary Retirement Scheme (SRS) has been set up to help Singaporeans save for retirement.

The SRS was created in 2001 to complement the Central Provident Fund (CPF) by giving people an incentive to save consistently over the long term.

The voluntary programme allows participants to contribute various amounts up to a cap - $12,750 a year for Singaporeans and permanent residents and $29,750 for foreigners.

Over the years, the nationality profile of the account holders has remained constant. As at December last year, 3 per cent were foreigners, Singapore permanent residents formed 12 per cent and Singaporeans made up the rest, based on figures from the Ministry of Finance.

Unlike the CPF, SRS does not give you a fixed rate of 2.5 per cent in interest.

What it does offer is tax benefits, which can save the participant a tidy sum.

Financial planner Albert Lam, IPP's managing director, believes it is a very useful scheme that people should seriously consider.

"For many of us, if we have cash in the bank account, the temptation is to spend it. But if put in SRS, where there is a penalty to be paid if it is withdrawn, chances are we will end up saving rather than spending it," he says.

How does the SRS work?

Each dollar contributed to the SRS reduces your chargeable income by a dollar.

If a person with chargeable income of $70,000 contributes the full $12,750, he could reduce his tax by $892 for the year.

There is no need to make a claim in your annual tax return as the tax relief will be granted by the taxman based on information provided by the SRS operators - DBS Bank, OCBC Bank and United Overseas Bank (UOB).

The sum of $892 might not seem a lot, but when measured against the initial sum of $12,750 of contributions, the tax savings work out to be about 6.9 per cent.

In other words, you would have to get 6.9 per cent in returns on $12,750 if you invested that sum in the market just to match the tax savings.

OCBC's head of deposits, Ms Carmen Chan, says savers should be made aware of this option as many can strongly benefit from the tax savings.

"It should be seen as a means to save more for the long term and for retirement, which people should already be doing," says Ms Chan. "And you get a tax break on top of that."

Mr Goh Teik Cheng, head of Research and Product Advisory, Personal Financial Services at UOB, says that investment discipline is the beauty of the SRS account.

"At UOB, the most popular investment products purchased via SRS are single-premium endowment plans, unit trusts and shares," he says.

What can SRS do for the saver?

Apart from the tax savings, you can also use the SRS to invest for your retirement.

Savers are not allowed to use SRS funds for property investments and there are some restrictions on the use of funds for insurance, such as being used only for single-premium plans.

But apart from these, the Finance Ministry, which manages the scheme, allows SRS monies to be used for a wide range of investment products, including shares, unit trusts, exchange-traded funds and real estate investment trusts.

They can take the money out to invest but any returns must go back into the account.

Savers can withdraw the money from the account as cash any time but they have to pay a penalty of 5 per cent of the value of the funds withdrawn if they take it out before they turn 62, the retirement age.

At the same time, if the funds are withdrawn before 62, they are also considered as income that can be taxed for that year.

Both rules are to encourage a more disciplined approach to saving.

Mr Brandon Lam, the senior vice-president and head of investment and treasury products at DBS Bank, notes that many people sometimes forget that SRS funds do not earn as much interest as CPF savings and need to be put to work to generate returns.

The Finance Ministry said that as at December last year, about 32 per cent of funds in SRS accounts - about $963 million - was sitting in cash.

"With inflation at 4 per cent, such cash balances are losing value over time," says Mr Lam.

Ms Chan believes that savers should not be using the money as a source of funds for trading.

Instead, they should be using the funds for long-term, stable investments that will generate significant returns in the long run, she says.

For instance, instead of punting on volatile stocks, maybe a better approach is to buy income funds that generate 5 per cent to 6 per cent a year, or blue-chip stocks that pay good dividends.

This slow and steady investing can snowball to a large sum over a long period.

IPP's Mr Lam adds that apart from being a source of investments, an SRS nest egg can be used as an emergency fund unlike savings in CPF, which are locked up. "For middle- to high-income earners, SRS may be used as a short-term savings reserve for emergency needs," he says.

Who should be contributing?

The scheme is open to anyone over 21 who is not a bankrupt or "of unsound mind", according to the Ministry of Finance.

But while anyone with cash can theoretically benefit, the system is set up to help those who pay income taxes because of the tax breaks, says Ms Chan.

She believes that those who earn $5,000 a month or more will benefit the most as they would probably end up having to pay higher taxes.

"As such, it also means that the scheme is more applicable to those who have worked some years," she says.

But DBS' Mr Lam believes that it is not necessary to wait to start saving: "The earlier you start the better, the harder your money works for you.

"You don't have to contribute the full $12,750 every year. Just put in what you are comfortable with."

What are the downsides?

The biggest drawback to the scheme, which can also be seen as its strength, is that it is meant to be a long-term savings tool.

Premature withdrawals incur a penalty and are also taxed.

When the saver withdraws his SRS funds after the statutory retirement age, he gets a 50 per cent tax concession.

The Finance Ministry allows withdrawals to be staggered over 10 years after retirement, or from when the withdrawal first takes place, which saves the contributor income taxes.

Still, despite the 50 per cent concession, the fact that withdrawals are still taxed after retirement is one big problem with the SRS and often cited by financial experts as to why the take-up is still lukewarm a decade after its introduction.

DBS' Mr Lam believes that the SRS is poorly understood and should be given more attention.

"Few people know of this scheme and its benefits. But it is a good supplement to other forms of retirement planning that individuals have in place."