SRS contributions are great for tax savings but may not be for everyone

TAX season is almost upon us, with tax filing season typically beginning on Mar 1. While Singapore’s personal income tax rate is generally considered to be lower than in other countries, there are ways to bring your personal income tax bill down even further.

In 2001, the government introduced the Supplementary Retirement Scheme (SRS) to incentivise Singaporeans to save more.

These incentives come in the form of tax benefits, with contributions to SRS accounts eligible for personal income tax relief. Currently, the maximum yearly contribution eligible for tax relief stands at S$15,300 for Singaporeans and permanent residents, and S$35,700 for foreigners.

It also makes sense for individuals to open an SRS account with DBS, OCBC or UOB as soon as they turn 18.

Because SRS funds are meant to be withdrawn at the statutory retirement age prevailing when individuals made their first contribution, depositors could potentially take advantage of a lower retirement age by opening an account sooner rather than later. The retirement age is 63 effective from Jul 1, 2022.

If SRS funds are withdrawn before the prescribed retirement age, there is a 5 per cent penalty on the withdrawal of these funds. The funds will also be subject to personal income tax in the year that they are withdrawn.

Does that mean that we should then put all our money into SRS accounts to lower the taxes we incur?

As DBS head of financial planning literacy Lorna Tan sees it, it may not make sense for everyone to place their funds into the SRS account.

“I would say for the new joiner to the labour force, it is actually not very significant in terms of tax savings,” Tan said, adding that an individual earning upwards of S$100,000 would be more likely to see significant savings.

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Take, for instance, someone who is earning S$50,000 a year. Not accounting for Central Provident Fund and other reliefs, their tax bill for the year of assessment (YA) 2024 would come up to S$1,250. An SRS contribution of S$15,300 would bring their gross tax down to S$364.50.

However, someone who is earning S$100,000 a year would incur a tax bill of S$5,650 in the same year. With the same SRS contribution, their gross tax would come down to S$3,890.50.

Even if you are earning a large enough amount that the tax savings from SRS contributions would be significant, you should also consider your near-term cash needs as well.

Endowus chief investment advisory officer Hugh Chung said that this is important to consider since any premature withdrawals will leave depositors paying more in penalties and taxes than they initially intended.

“This is especially true for young adults looking to make big ticket purchases on homes, cars, or those just starting a family and may require more liquidity,” he said.

Only under special circumstances, such as in the case of terminal illness or bankruptcy, can funds be withdrawn without the 5 per cent penalty, although a proportion of the funds withdrawn will still be subject to the prevailing income tax.

Making the funds work for you

Once the contributions are made, they should also be invested, said DBS’ Tan.

Because SRS accounts only accrue 0.05 per cent per annum in interest, they rapidly depreciate, especially as the inflation rate remains high.

While she has a preference for shares, Tan noted that SRS funds also qualify for fixed deposits as well as bonds.

“When I started contributing to SRS, I felt that there’s quite a long leeway, more than 10 years to ride out market volatility, so I decided to take a bit more risk and put my money into a diversified portfolio of shares,” she said.

Similarly, Chung encourages investors to look beyond risk-free products to get a positive return after inflation.

“We believe that Singapore-based investors should consider investing in a globally diversified portfolio using their SRS and CPF ordinary account monies, as a large percentage of their wealth is already tied to their residential property value.

“Based on their risk appetite, they should invest in a combination of global equities and fixed income products that can beat inflation,” he said.

When it is time to withdraw the funds, Tan also has a word of advice for depositors: Spread out your withdrawals so the quantum of each withdrawal falls within a lower tax bracket over 11 years. Half of the withdrawn amount will be subject to the prevailing personal income tax rate.

For instance, a one-time withdrawal of S$500,000 in YA2024 will incur S$30,700.00 in gross tax. However, 11 withdrawals of S$45,455 will incur just under S$600 in taxes.

Depositors should note that after 10 years from the first penalty-free withdrawal, the balance in the SRS account will be considered withdrawn, and half of the balance remaining in the SRS account will be subject to tax in the following year.