Maximise the benefits of your SRS account
Parents’ love for their children manifest in many different ways. For some, buying their favourite food is a love letter. For others, it’s about allowing them to reach their full potential. But increasingly, it’s also about being financially prepared for retirement so that your children are “free” to pursue their dreams and provide for their family.
This is where the Supplementary Retirement Scheme (SRS) comes in handy, thanks to the tax reliefs that the voluntary contributions attract.
(Check your knowledge: Do you know how SRS works? If not, our Guide to SRS accounts can get you up to speed about what SRS is, and how it can help your retirement plan.)
Why You Shouldn’t Leave Your SRS Account Idle
But there’s a slight caveat you should know. If you just stop at opening the account, you may be selling yourself short. Here’s why:
- Inflation dwindles the value of your money
Inflation is the phenomenon where the value of your money drops. In the 1970s, a dollar could probably buy you many cups of coffee. These days, you would struggle to even buy 1 cup with that same dollar, even if you’re at a hawker centre. Just like how coffee is costing more, things are going to cost more at the time when you withdraw your SRS monies.
- You are losing out on potential interest earnings
Furthermore, the interest rate on SRS funds is fixed at ONLY 0.05% per annum. This is unlike the CPF funds where you can earn 2.5% (or up to 3.5%) interest rate per annum on your money. It’s not such a great idea to just keep saving. Thus, it’s crucial that you invest your funds to stay ahead of inflation.
So, if you really want to maximise the benefits of your SRS account and let it work harder for you, here’s our guide on 7 ways to maximise and grow your SRS money.
7 Ways To Maximise Your SRS Account
Your SRS account lets you invest in a multitude of investment products, from bonds to unit trusts to shares.
For the more conservative investor, you may wish to consider Singapore Government Securities or single premium insurance products. These investment products have relatively lower risks and are suited for parents. Even placing funds in a fixed deposit and earning 1.40%-a-year interest could turn out to be a better option than letting your contributions sit idle.
For more diverse investments, you can consider Unit Trusts, Exchange Traded Funds or REITs. As all investments carry an inherent risk, make sure you are prudent in selecting what to invest in. If you are unsure, you can always seek professional advice.
And if you need to see some projections, use the SRS calculator to gauge your expected returns through the years. You can also use the SRS calculator to check how much tax savings you can enjoy when you regularly contribute to the account.
Things You Should Know Before Investing Your SRS Money
- Start with the basics
The first thing you should do is to be clear about what you want to invest in. If you’ve just started investing or are unfamiliar with investment products, do read up on the different types of investments permitted for SRS to better understand their advantages and disadvantages.
- Approach a good Financial Advisor if you need help
You should also familiarise yourself with basic investment concepts, such as risks vs returns, simple financial ratios, passive vs active investing and diversification.
If you aren’t so savvy, a good financial advisor might help. A good financial advisor will be able to explain those concepts to you and help you work out your risk profile.
- Take note of your investment fees because they can make a difference
Another thing to note is the fees that come with the investment. These fees can make a significant difference to the returns of your SRS account. While the services offered are the same, different banks/firms may charge different brokerage and transaction fees, or offer different incentives and promotions.
- Profits go back to your SRS account
Finally, you should keep in mind that all profits made from investing your SRS contributions will return to your SRS account.
If you have been thinking about investing in stocks using your SRS account contributions, you can do so using a DBS Vickers account.
Striking the Right Balance Between SRS Contributions and Your Earned Income
While it is wise not to let your SRS money lay stagnant, you should also not overstretch your finances by overcontributing to your SRS.
You should keep in mind that contributing to your SRS account is a regular, stretched-out process. Sometimes, there might be other financial priorities which you need to consider, such as saving for your child’s tertiary education. Thus, it is important to strike a balance between how much you earn (and tax paid), and how much you put into your SRS account.
As Singapore’s system of tax is progressive, it helps to know your tax bracket. If you fall into the higher income brackets, the tax reduction from maxing out the SRS contribution for the year can be significant.
For example, assuming you are a Singaporean citizen and made the maximum contribution of S$15,300, these are the tax savings you’re looking at.
Knowing When To Withdraw Your SRS
The time of withdrawal of your SRS money is also an important factor that determines whether you are maximising the benefits of your SRS account. That’s because only 50% of withdrawals (post statutory retirement age) are taxable every year. This means that if you can carefully plan your withdrawals to fund your post retirement life, you can reduce your tax burden.
For example, for a Singapore Resident:
- If you withdraw S$40,000 per annum, 50% of that amount (S$20,000) will be taxable each year.
- If you have no other source of taxable income, you will not be liable for any income tax (since first S$20,000 of total annual income is tax-exempted).
Do note that this reduced-taxation is only valid for withdrawals over a 10-year window. Also, bear in mind that any contributions or gains will be maintained in your SRS account – any early withdrawal will incur a 5% penalty and the amount that is withdrawn is also fully taxable.
With careful planning of your contributions and your withdrawals, you can maximise your SRS contributions and actively build your retirement fund. It will help you avoid relying on your children as your retirement plan.
Disclaimers and Important Notice
This article is meant for information only and should not be relied upon as financial advice. Before making any decision to buy, sell or hold any investment or insurance product, you should seek advice from a financial adviser regarding its suitability.
All investments come with risks and you can lose money on your investment. Invest only if you understand and can monitor your investment. Diversify your investments and avoid investing a large portion of your money in a single product issuer.
Deposit Insurance Scheme
Singapore dollar deposits of non-bank depositors and monies and deposits denominated in Singapore dollars under the Supplementary Retirement Scheme are insured by the Singapore Deposit Insurance Corporation, for up to S$75,000 in aggregate per depositor per Scheme member by law. Monies and deposits denominated in Singapore dollars under the CPF Investment Scheme and CPF Retirement Sum Scheme are aggregated and separately insured up to S$75,000 for each depositor per Scheme member. Foreign currency deposits, dual currency investments, structured deposits and other investment products are not insured.
Disclaimer for Investment and Life Insurance Products