You will be able to explain the tax benefit of SRS and the conditions attached to it.
It is late December, and Farhan's office chat fills up with the same message every year: has anyone put money into SRS yet, the deadline is coming. He has heard that it saves tax. He has also heard that the money gets stuck until retirement and earns almost nothing. Both are partly true, and neither tells him whether SRS belongs in his portfolio.
This lesson explains how the Supplementary Retirement Scheme works for someone who invests in ETFs, where the tax benefit comes from, and what it asks of you in return. Lesson 6.3 of The Singapore personal finance system, Where you can hold investments in Singapore, introduced the account. Here the focus is on using it as part of a portfolio.
SRS is a voluntary account you open with one of the banks appointed as SRS operators. You pay in cash, and contributions are tax deductible, which means they reduce your chargeable income for the year. There is a yearly contribution cap, set by IRAS and the Ministry of Finance, and it is different for Singapore citizens and permanent residents than for foreigners. Check the current figure on the IRAS website before you contribute, because the cap can change.
The saving depends on your marginal tax rate, the rate you pay on the last dollar of your income. Made-up example: you contribute S$10,000 and your marginal rate is 10%. Your chargeable income falls by S$10,000, and your tax bill falls by about S$1,000. Someone on a higher marginal rate saves more from the same contribution, and someone who pays little or no income tax saves little or nothing. Look up the current income tax rates on the IRAS website to find your own marginal rate.
The deduction applies in the year of assessment that follows the year you contribute, which is why December is busy. Contributions made after 31 December count for the next year.
Cash sitting in an SRS account earns a low rate of interest set by the operator bank. That is the part of the rumour that is true: SRS money left as cash can easily lose buying power to inflation for decades, which undoes much of the tax benefit.
So for an ETF investor, the question is what to buy with it. SRS operators let you invest in a range of products, which commonly includes many SGX-listed shares and ETFs, unit trusts, Singapore Government Securities and some other options. The exact list and how you buy depend on your operator and on the brokers that accept SRS money, so check before you plan. Some funds you found in module 3 may not be available through SRS, particularly those listed on overseas exchanges, and that can mean holding a different fund on the same index inside SRS. Your comparison sheet from lesson 3.5 can handle that: just add a row for the fund you can actually buy in SRS.
The other half of the benefit comes when you withdraw. According to IRAS, from the statutory retirement age that applies to your account, only 50% of each withdrawal counts as taxable income, and penalty-free withdrawals can be spread over up to ten years. The age that applies to you depends on when you made your first contribution; IRAS publishes the rules.
Put the two halves together. You save tax at your marginal rate on the way in, during your working years when your income is likely to be higher. You pay tax on only half of what you take out, in years when your other income may be lower, and the ten-year spread lets you keep each year's taxable amount small. For many people, the tax on withdrawal ends up much lower than the tax saved on contribution. How much lower depends on your income in retirement and on tax rates then, which nobody can know today.
Withdrawals before the statutory retirement age are, in general, fully taxable, and a penalty is added on top. There are exceptions for specific situations such as death, medical grounds or foreigners who meet certain conditions; IRAS lists them and sets the current penalty. For planning, treat SRS money as unavailable until your statutory retirement age.
That shapes what SRS is for. Money you might need for a home, a career break or an emergency does not belong there. Money you would not touch for decades anyway does, and that is the same money lesson 1.3, Set your split from horizon, need and nerve, said could hold the most shares. Lesson 7.3 builds on that link.
Farhan does the sums with his own figures. He looks up the current cap and his marginal rate, works out his saving on a made-up contribution, and decides SRS fits the retirement part of his long-term money. He also checks which world equity ETFs his SRS operator allows, because the fund he picked in module 3 may not be on the list. Start with the cap and your own marginal rate, since those two figures decide whether the rest of this is worth your time.
Check the current SRS contribution cap on IRAS and estimate your own tax saving from a made-up contribution at your marginal rate.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).