4 Ways to Make the Most of Your SRS Account
Co-founder and CEO
True to its name, Supplementary Retirement Scheme (SRS), really can only be used to prepare for retirement, unlike CPF funds that can be used to buy property or pay for medical expenses. So, it’s important to make sure that you’re doing the most with your SRS bank account to prepare as much as you can for your retirement.
If you’re not currently contributing to an SRS bank account, read here about why you should have an SRS bank account.
Assuming you do have an SRS bank account, did you know there are ways to make even more of those contributions?
Here, we break down a few strategies that can help you maximise your long-term wealth with your SRS bank account.
Adopt a long-term mindset
Once you start contributing to your SRS bank account, you can't withdraw those funds before the statutory retirement age, 62, without paying a 5% penalty and any applicable taxes on the withdrawals. So, you should should treat your SRS bank account as though it’s completely locked up. To ensure you won't need to tap into those funds, follow a simple rule to contribute to your SRS only if you have sufficient liquidity. What’s sufficient liquidity? You should have at least 9-12 months of living expenses between saving accounts and low-risk, liquid investments. To learn more about setting up an effective emergency fund, read here.
Contribute the maximum amount
Singaporeans and PRs can contribute to their SRS bank accounts up to $15,300 SGD per year, and foreigners can contribute up $35,700 SGD per year. These contributions are deducted from your tax bill each year. So, if you have enough savings in liquidity, contribute the maximum amount possible to your SRS bank account each tax year. This way, you can strike a balance of liquidity and tax reliefs.
Your SRS contributions earn a mere 0.05% interest per annum if you keep them only in the SRS bank account. When you consider that inflation is approximately 2%, your SRS contributions will lose value over time. Hopefully that low 0.05% interest per annum is enough to convince you that you should invest your funds, at least to keep up with inflation, but also to earn more in the long term. When you earn money with your SRS investments, those funds will go back into your SRS bank account before you can liquidate them.
If you contribute $15,300 SGD per annum and you keep it in cash, you’ll have $306,000 SGD after 20 years; if instead you invest the savings and earn 5% net returns per annum, you will have $459,000 SGD after the same 20 years.
Value of SRS Savings versus Investing SRS Funds
Such is the power of investing your SRS funds. Given that you’ve already decided you don’t need this money for a long time, make sure your SRS funds work for you during this time. Just as with any investment, be sure to pay close attention to the different fee and pricing structures of the investments you choose.
Strategise your withdrawals
Timing your withdrawals properly is the key to maximising your tax advantage with your SRS contributions. Unlike with CPF, the money can’t be invested in property, and cannot be withdrawn for medical purposes. If you don’t meet the early withdrawal conditions, you will face a 5% penalty, and 100% of the withdrawal would be taxable. And once you withdraw, you can’t contribute again.
When you reach the statutory retirement age, 62, you can spread out your withdrawals over a period of up to 10 years, starting on the date of your first withdrawal, and 50% of your SRS bank account withdrawal will be subject to tax. The best strategy, therefore, is to minimise any income tax during those 10 years by spreading the withdrawals out if you do not have any other income or if you have steady other income, or by withdrawing less in the years when you receive additional income.
Currently, personal income starts getting taxed at $20,000 SGD. This means that, if you do not have any other taxable personal income, you can withdraw up to $40,000 per year tax-free from your SRS bank account, for 10 years.
Are you making the most of your SRS funds?
There’s a lot to consider: from how much you contribute each year, to when and how much you withdraw, and where you invest the funds. But it’s hard to dispute that SRS can be a great way to save more for retirement, especially when you grasp and take advantage of the long-term benefits.
Want to learn about investing your SRS funds with StashAway? WhatsApp us here.