wealtharticles-srs

Supplementary Retirement Scheme (SRS)

It is a pain to pay taxes, and taxpayers who want to enjoy some savings next year can consider contributing to the Supplementary Retirement Scheme (SRS), but they must do so by Dec 31.

Set up in 2001, the little-known scheme is meant to complement Central Provident Fund savings. It gives wage earners an incentive to save for retirement as well as enjoy tax relief.

SRS is administered by the Ministry of Finance and is a voluntary scheme where participants contribute varying amounts of cash.

Annual contributions are capped at $11,475 for Singaporeans and permanent residents and $26,775 for foreigners.

The money may be used to buy investment instruments like shares and unit trusts, or it can be deposited with banks where it earns prevailing savings or fixed Deposit rates. Since the scheme’s inception, the number of SRS account holders has jumped from 11,890 in its first year to 46,442 in December last year. SRS funds have also grown from $157 million to $1.72 billion over the same period.

The scheme is nt without its detractors, who want a higher contribution cap and for the early withdrawal penalty to be waived. The latter is often-cited drawback of the SRS. A 5% penalty fee is imposed if a withdrawal is made before the statutory retirement age.

Another beef they have with the scheme is that if you withdraw the sum before retirement age, 100% of it will be considered taxable income and taxed accordingly. This includes whatever capital gains you could have made from your investments using your SRS funds.

However, you get a 50% tax concession when you withdraw your SRS funds after statutory retirement age. Financial experts advise SRS participants to plan carefully before putting money into the scheme. An advocate of SRS, she routinely recommends it to her clients.

SRS can be a useful tool in one’s financial plan but it should be used in conjunction with other sources of income in your golden age. Financial advisers say you should participate in SRS only if you do not need the cash till you retire.

You should also avoid withdrawing all you SRS funds in a lump sum after your statutory retirement age so that you do not attract too much tax. SRS has a 10-year withdrawal period. If retirees, who have lower or nominal income, stagger their SRS withdrawals, they may end up having to pay little or no tax.

Here are some things you should know about SRS.

Why should I consider contributing to SRS?
The scheme has 3 key benefits. One is that it is a way to encourage consistent savings for retirement. Another is that it is tax deductible against one’s annual income. Each dollar of SRS contribution will reduce a person’s chargeable income by a dollar.

For a person with a taxable income of $100,000, a $10,000 contribution works out to him paying $1,400 less tax based on current tax rates. The tax relief from SRS contributions can be used to offset his assessable income when he files his tax return the following year. There is no need to make a claim in your annual tax return as the tax relief will be granted by the tax authorities based on information provided by the SRS operators.

Finally, SRS contributions can be used to invest in a range of wealth products. A rough working says, if you set aside $11,475 a year for 25 years and have it invested at 4% per annum, you would build an additional nest egg of $497,000.

How do I participate in SRS?
You can open an SRS account at the participating branches of any of the three SRS operators by filling up a form. This can also be done online. The operators or administrators are DBS Bank, OCBC Bank and United Overseas Bank. No charge is impose for opening an SRS account.

You can choose to leave your contributions in cash with your SRS operator till you have decided what to invest in. Assuming you want to buy stocks with your SRS funds, let your broker know your SRS account number after the stock transaction.

Do I need to contribute regularly to SRS?
No. You may contribute at any time and as often as you wish, on or before 31^st December each year, provided you are still eligible for the scheme. The total annual contribution cannot exceed the contribution cap. The amount need not be the same every year.

When can I make a withdrawal from my SRS account?
Anytime. However, if you make a withdrawal before the statutory retirement age prevailing at that time of your first contribution, 100% of the sum withdrawn will be subject to income tax. A 5% penalty for premature withdrawal will also be imposed. This is to encourage people to be disciplined when saving for retirement. The current statutory retirement age is 62.

Are dividends received from unit trusts bought with SRS funds taxable?
Generally, dividends from unit trusts bought with SRS funds are not taxed when they are credited into the SRS account. However, tax will be imposed on the account should withdrawn from the account.

Are there circumstances under which the 5% penalty for premature withdrawal does not apply?
Yes, if you die, if you are suffering from a medical condition or are made bankrupt. It also does not apply if you are a foreigner and have maintained your SRS account for at least 10 years from the date of your first contribution.

How do I take advantage of the 10-year withdrawal period to ensure that I pay minimal or no tax?
You enjoy a 50% tax concession if you withdrew your SRS savings on or after the statutory retirement age prevailing when you made your first SRS contribution, or on medical grounds. You are allowed to spread your withdrawals over 10 years and the 10-year period starts from the date of your first withdrawal.

As a retiree is likely to have a lower income at retirement, he may end up paying little or no income tax if his withdrawals are staggered over the 10 years. In fact, if you are a retiree with no other source of income, you can withdraw up to $40,000 from SRS tax-free annually over the 10-year withdrawal period. This works out to a total tax-free sum of $400,000.

Do I have to withdraw all my SRS funds at the end of the 10-year withdrawal period?
No. But whatever remains in your SRS account at the end of the withdrawal peiord will be taxed at 50%.

What investment instruments can I buy using my SRS funds?
You can invest in a range of instruments including those offered by financial institutions other than your SRS operator. They are fixed deposits, foreign currency deposits, government bonds, stocks, exchanged-traded funds, unit trusts and insurance products.

There are criteria for investing in life insurance products. For example, only single premium products are allowed and life cover is capped at 3 times the single premium. Some types of life insurance such as critical illness, health and long-term care are excluded, as are direct property investments.

Must all proceeds from the sale of my SRS investment instruments be returned to my SRS account?
Yes. Proceeds from the sale of your SRS investments such as stocks and unit trusts must be returned to your SRS account. In such instances, inform the institution handling the transactions that the proceeds have to be returned.

Is there a guaranteed rate of return on the investments I make with my SRS funds?
No.

Can I nominate a beneficiary for my SRS funds?
There is no such provision. When an SRS account holder dies, the SRS balances form part of his estate and will be distributed according to his Will or the law (Intestate Succession Act) in the absence of a Will.

There will be no 5% penalty on withdrawal and only half of the withdrawal will be subject to income tax. SRS operators may require the Grant of Probate or Letters of Administration to be produced by the executor or administrator of the estate to ensure that assets in the SRS are distributed correctly.

Lorna Tan, Sunday Times, 15 November 2009