One of the most complicated things that every Singaporean will have to deal with, is undoubtedly, our CPF system. Despite being built for our good and to prepare us for retirement, it remains misunderstood by Singaporeans.
But as if that wasn’t difficult enough, now we also have the SRS to think about! Oh bless, I can already feel the headache coming along. Fret not, let’s break it down slowly.
What is SRS?
The Supplementary Retirement Scheme, or SRS for short, is a scheme to supplement retirement planning under the CPF board. This was mainly due to the fact that most Singaporeans wipe out most of their CPF-OA to pay for their housing. As such, by creating the SRS, Singaporeans would likely be more prepared for their eventual retirement.
One thing to note, however, is that the SRS is a voluntary scheme, unlike the CPF.
Who Can Open an SRS Account?
An SRS Account can be opened by any Singaporean citizen, Permanent Resident (PR) or Foreigner who makes any income in Singapore, as long as they are:
- At least 18 years old
- Not an undischarged bankrupt
- Not suffering from a mental disorder
- Capable of managing themselves and their affairs
Where Can I Open an SRS Account?
Why Should I Open a SRS Account?
Okay, so after talking for so long, I haven’t actually touched on the whole point of the SRS anyways. Like what are the tangible benefits for the end users?
The SRS mainly uses a tax incentive in order to attract people to use it, to help them save up for retirement.
Contributions made to SRS are eligible for personal tax relief. This means that if your taxable income for the year is $48,000 and you contribute $2,000 to your SRS, your final taxable income will only be $46,000! DBS has a handy calculator to illustrate this better.
As with most things, there are terms and conditions to be aware of.
Firstly, the maximum contribution to SRS is $15,300 for Singaporeans or PRs and $35,700 for foreigners.
Secondly, your total personal tax relief is capped at $80,000. This means that it is important to know what other personal tax reliefs you are eligible for before you consider embarking on this scheme, else your effort might be for nothing.
Lastly, and arguably most importantly, there are tax implications!
What? Did you think you could escape taxes without strings attached? Think again.
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Officially, you are able to withdraw from your SRS account at any time.
Depending on when and how you withdraw, the amount will be subjected to tax (plus penalties if any) as your taxable income.
Account holders can withdraw from their SRS accounts without penalties on or after the statutory retirement age when they made their first contribution (which is currently 62). This is also why many financial advisors will advise you to deposit $1 into your SRS account as early as possible, to ‘lock in’ the age from which you can start withdrawals without penalties.
After your first penalty-free withdrawal from your SRS account, withdrawals can be made for another 10 years from this point, at the end of which, the remainder if any, will be deemed to have been withdrawn.
For example, John begins his first withdrawal at the retirement age of 62. His withdrawals will go on for 10 years, up till 72. If John chooses to begin his withdrawals later, say at age 65, then his 10 years of withdrawals will last until the age of 75.
As for taxes, if you attempt to withdraw before the retirement age, the entire amount will be subject to tax. Moreover, on top of that, you will be slapped with a 5% penalty on the withdrawn amount. For example, if you attempt to withdraw $40,000 before your retirement age, you will lose out on $2,000 (5% x 40,000) to the penalty and tax will be paid on $40,000.
If you withdraw at or after the retirement age, only 50% of the withdrawal will be subject to tax. So, for example, if you attempt to withdraw $40,000 at the age of 62, tax will be applicable to $20,000. (However, since income under $20,000 is not subject to tax, this withdrawal will actually be tax free anyways).
Note that the tax rate levied will be the individual income tax rate that you are subject to at the point in time based on your income bracket if you’re a Singaporean.
As a foreigner or PR, the tax rate levied will be based on the withholding tax rate here.
To be Continued…
Wow, all of that is a whole lot of information to take in. Even though all these schemes are made to help Singaporeans financially, do they really have to make it so complicated and difficult to understand everything?
Hmm, but after all that, what can I do with the money in my SRS Account? How much interest does it yield?
Stay tuned next week for the second part of this article to cover SRS Account benefits and what you can use your SRS money for!