You will be able to explain how SRS contributions work, the yearly limit, and why the money stays in until retirement age.
Darren is a school teacher. Every December, his school staffroom has the same conversation about SRS.
One teacher has just put money into SRS. Another says SRS is a trap because the money is stuck until retirement. A third says he opened an account years ago with one dollar and never touched it again, and nobody knows whether that was clever or pointless. Darren had nodded along for three years without knowing which of them was right. The rules below show where each of them is coming from.
The Supplementary Retirement Scheme (SRS) is a voluntary savings account for retirement. You open it with one of the banks that act as SRS operators. You can have only one SRS account at a time. Nobody else pays into it for you. Each year you decide whether to contribute and how much, anywhere from nothing up to the yearly limit.
Each dollar you contribute is relief from income for that year. The contribution reduces your chargeable income, so it saves tax at your marginal rate, like every other relief in the course. Contributions made by 31 December count for the next year of assessment. SRS relief also counts toward the cap on total personal reliefs, which is covered in lesson 3.3, "The relief cap and the order you claim in".
The government sets the yearly contribution limit, and IRAS publishes it. There is one limit for Singapore citizens and permanent residents and a higher limit for foreigners. No limit figures are given here. Before you plan an amount, look up the current figure for your status on the IRAS website.
SRS is designed for long-term money. You can withdraw at any time, but the tax depends on when you withdraw. From the statutory retirement age that applies to your account, withdrawals get favourable tax treatment, which lesson 4.3, "The tax on withdrawal, and what early withdrawal costs", explains. Apart from a few exceptions, withdrawals before that age are taxed in full, with a penalty on top. This is the rule the teacher who called SRS a trap had in mind.
Module 4 of this course follows the SRS tax treatment all the way through. If you invest, the course Build and run an ETF portfolio covers SRS from an investor's point of view in lesson 7.1, "How SRS works for an ETF investor".
The statutory retirement age that applies to you is fixed by the date of your first contribution. It is the age in force when you first put money in. The government has been raising the statutory retirement age in steps, so a later first contribution can mean a later retirement age for your account.
This explains the one-dollar account. A small first contribution made early locks in the retirement age in force at that time, even if you don't contribute again for years. Whether that's worth doing depends on whether you're likely to use SRS at all, but it is not pointless. IRAS publishes the current statutory retirement ages and the rule on its website.
You work out the saving from an SRS contribution the same way as for any relief:
Take your expected chargeable income. Subtract the contribution. Run both amounts, before and after, through your band formulas from lesson 1.4, "Rebuild your tax bill from scratch". The difference in tax is the saving. If both amounts sit within one band, the saving equals the contribution times your marginal rate.
Darren's chargeable income is S$33,000 (an invented example), which puts him at a 3% marginal rate under the practice table. He tries a contribution of S$10,000, an example amount below the limit. S$33,000 - S$10,000 = S$23,000, which is still inside the 3% band, so his saving is S$10,000 x 3% = S$300.
His sister Shu Ting decided on a top-up in lesson 3.4, "Decide your top-up for the year". After that top-up, her expected chargeable income is S$79,000, in the 6% band. She runs the same S$10,000 contribution. S$79,000 - S$10,000 = S$69,000, all within the 6% band, so she saves S$10,000 x 6% = S$600.
They contribute the same S$10,000, but Shu Ting saves twice as much as Darren because her marginal rate of 6% is twice his 3%.
The tax saving on its own doesn't tell you whether SRS is worth it. That also depends on what the money does inside the account and on the tax when you withdraw it. The next three lessons cover both.
On the tax side, SRS tends to suit people who have a higher marginal rate now, money they are confident they won't need until retirement, and a plan to invest what goes in. It tends to suit people less if they are in a low tax band, may need the money for a home or a career break, or would leave the money as cash.
Darren's conclusion is that at 3%, S$10,000 saves him S$300 and locks the money up for decades. He isn't ruling SRS out, but he wants to see the whole picture first.
For the activity, look up the current SRS limit that applies to you on the IRAS website. Then use your rebuild sheet to work out what a full contribution would save at your marginal rate.
Look up the current SRS limit that applies to you. Write it down, then work out how much tax a full contribution would save at your marginal rate.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).