More young investors turning to SRS for retirement needs

YOUNG Singaporeans, increasingly savvy about growing their cash, have taken to a tax relief and savings growth scheme to build their nest egg for retirement.

The share of younger people with Supplementary Retirement Scheme (SRS) accounts has risen steadily over the years, according to data from the Ministry of Finance. As at end-2015, 11 per cent of SRS account holders were between the age of 18 and 35. This share had risen to 19 per cent at the end of 2020.

Investors can open an SRS account at one of the local banks: DBS, OCBC or UOB. Every dollar contributed to SRS accounts is tax deductible (subject to an annual tax relief cap of S$80,000), up to the contribution cap of S$15,300 for Singaporeans and PRs, and S$35,700 for foreigners.

This means, for instance, that if your taxable income is S$100,000 and you put S$10,000 into your SRS account, you pay tax on S$90,000, not S$100,000.

Contributions need to be made by Dec 31 in order to claim tax relief for income earned in that particular year.

Wealth experts note that certain groups of people are likely to benefit more from SRS than others, including mid- to high-income earners, and those with cash that can be set aside until retirement.

While the scheme has been growing in popularity among younger investors, it remains most popular among those aged between 36 and 55, who are probably at the peak of their earning power. As at last December, 28 per cent of all SRS account holders were aged between 36 and 45, while 29 per cent of them were between 46 and 55 years old.

Beyond tax relief

Funds in SRS accounts can be used to invest in a selected range of financial instruments, including stocks, unit trusts, fixed deposits, and single premium insurance products, including endowment plans. SRS funds cannot be used for property investments.

SRS funds held in cash earn interest of just 0.05 per cent per annum, and will "most certainly lose value over time", notes Dr Ben Fok, the chief executive of Grandtag Financial Consultancy. As such, it is important to explore investment options with your SRS monies, he adds.

Nonetheless, a significant share of SRS contributions remains uninvested. Some account holders simply believe that they should not subject their retirement savings to any risk, says Samuel Rhee, chief investment officer of wealth management platform Endowus. Others are unaware of the investment options available for SRS which would allow them to accept some risk to achieve potentially better outcomes.

As at Dec 2020, there were about 220,000 SRS account holders here who had contributed a total of S$12.2 billion to their accounts. About a quarter of all SRS funds were still sitting idle in cash, according to the latest data from the Finance Ministry. A similar share went towards insurance, and 29 per cent was invested in equities.

"Investors should adopt a long-term perspective when contributing to their SRS accounts. If you don't invest the funds, you will be better off keeping the money in cash instead of locking it up for years," Fok says.

Tan Wei Mei, the chief advisory officer at wealth management platform Endowus, says that it is more important to actively invest SRS funds compared to the money in one's Central Provident Fund (CPF) account. While funds in the CPF Ordinary Account (OA) earn 2.5 per cent interest per annum, SRS funds only earn 0.05 per cent.

"The opportunity costs of not allocating to equities and fixed income via SRS is even higher than that of CPF OA as a consequence," she adds.

Optimising withdrawals

Unlike CPF, investors have the option of withdrawing funds from their SRS accounts prior to retirement. Withdrawals at retirement are given a 50 per cent tax concession and can be spread over 10 years to minimise taxes. At the end of the 10-year withdrawal period, half of the balance remaining in your SRS account will be subject to income tax.

The catch is that early withdrawal before the statutory retirement age (currently 62 years) means having to pay taxes on the full amount taken out, plus a 5 per cent penalty. The penalty can be waived under special circumstances such as death, medical grounds and bankruptcy.

Experts note that it is important to consider whether you might require the funds in the short-term before contributing to your SRS account, as making premature withdrawals could result in a larger quantum of penalties and taxes than what was gained in tax savings.

To get the most out of your savings in SRS, experts recommend making withdrawals only after you have retired and have stopped earning an income.

"Let's assume that you have S$400,000 in your SRS. If you withdraw S$40,000 each year, 50 per cent of that amount (S$20,000) will be taxable each year. Should you have no other sources of taxable income, you will not be liable for any income tax as the first S$20,000 of total annual income is tax-exempted," says Lorna Tan, the head of financial planning literacy at DBS.

If you have already opened an SRS account and made your first contribution, any subsequent changes in the statutory retirement age (for example, up to age 65) will not affect you. This means you can still begin your first penalty-free SRS withdrawal when you reach age 62.

What to buy?

There are some limitations to SRS investing. The sophisticated investor may find SRS has limited approved investment products in the market. For example, SRS funds can only be invested in domestic instruments, that is, Singapore dollar-denominated investments, which narrows investors' options.

In addition, some SRS account holders might not know where to start and how to invest for the long term.

Chiam Sheng Shi, the personal finance lead at wealth management platform Endowus, notes that SGX-traded Reits, ETFs, shares and other products are a popular SRS investment option for Singapore tax-residents. However, there are some disadvantages associated with these investment options.

Most notably, investors are limited to using local brokerages to trade, and are subject to associated trading fees, which means not being able to invest small amounts cost-efficiently.

Chiam notes that investors might therefore feel compelled to make larger SRS contributions before starting to invest, or leave the dividends and interest received from SRS investments in cash instead of efficiently re-investing the funds.

Annuities and endowment plans are another popular option, but have larger investment requirements and longer lock-in periods, Chiam adds.

Ultimately, SRS account holders should consider their risk tolerance and financial goals before taking the plunge.

There is no one-size-fits-all approach to investing for retirement, notes DBS's Tan.

"What's most important is to take a disciplined and long-term approach, with investments that meet your specific risk-return objectives," she adds.

Jacquelyn Tan, UOB's head of group personal financial services, recommends that investors should also follow a "time in the market" approach and invest a fixed amount on a regular basis, rather than trying to "time the market".

"This practice of dollar-cost averaging is a long-term view of investing which helps investors to ride out short-term market fluctuations with peace of mind," she adds.

Besides being diversified across geographies and industries, Endowus's Chiam says investors can grow their SRS funds most effectively by investing through a low-cost platform, into low-cost unit trusts, to minimise the loss of returns through fees.

"While investing in unit trusts that are exposed to global markets is the best strategy, ensuring that you have the lowest cost access to this SRS investment strategy and funds is key," he adds.

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