You will be able to explain why uninvested SRS cash loses value and what can be held inside.
When Shu Ting mentioned SRS to her manager Raymond, he opened his SRS statement for the first time in two years and found S$20,000 of contributions sitting there as cash. The interest for the whole of last year came to a few dollars. He had claimed the relief both years and felt good about it, right up until he did a rough sum of what that cash would be worth in thirty years.
This lesson is about the half of SRS that most people skip: what the money does once it's inside. The tax relief gets the money in. What you hold decides whether it's worth having there.
Money you contribute lands in your SRS account as cash. The operator bank pays interest on that cash at a rate it sets, and it has usually been very low, a small fraction of a percent. Check the current rate on your bank's SRS page.
Low interest matters more here than in a normal savings account, because SRS money is meant to stay put for decades. Over that time, prices rise. Cash that earns almost nothing loses buying power every year, and the loss compounds.
Take example figures. Suppose S$10,000 sits in SRS as cash for thirty years, earning 0.05% a year. It would grow to about S$10,151. If prices rise by 2% a year over the same period, also an assumption, that S$10,151 would buy what about S$5,604 buys today. The tax relief on the way in is small beside that loss. On S$10,000, Shu Ting's would be S$600 at her 6% marginal rate, from lesson 4.1, How SRS works and who it suits.
So for most people, the SRS decision is two decisions: whether to contribute, and what to invest the money in. Contributing and leaving it as cash is usually the worst of both.
SRS money can be invested in many kinds of product, through your operator bank or through brokers and fund platforms that accept SRS money. Commonly allowed are:
shares and ETFs listed on SGX unit trusts and some robo-advisory portfolios Singapore Government Securities, Treasury bills and Singapore Savings Bonds fixed deposits with the operator bank some insurance products, such as single-premium annuities and endowment plans
What you can buy depends on your operator bank and on which brokers and platforms accept SRS money, and the lists change. Many overseas-listed funds can't be bought with SRS, so the fund you'd choose in a normal brokerage account may not be available. Check before you plan.
Two tax points come with investing inside SRS. Gains and income inside the account aren't taxed as they arise. Instead, what you take out is taxed under the withdrawal rules, whatever it was made of. And losses inside SRS can't be used to reduce your other taxable income.
The best guide to what to hold is how long the money will stay. For someone in their thirties, SRS money may sit for twenty-five or thirty years before the first withdrawal, and then be drawn down over the years after that. That is long-term money, the kind that can usually ride out bad years in the market.
Short-term products, such as fixed deposits and T-bills, are a reasonable place to park money briefly while you decide. They're a poor home for decades, since their returns tend to track interest rates and may barely beat inflation.
How to choose the portfolio itself, the split between shares and bonds, which index, which fund, is taught in Build and run an ETF portfolio. Its lesson 7.3, Which money goes in which account, covers how to decide what goes inside SRS and what stays outside. This course doesn't tell you what to buy. It makes sure you know that leaving the money as cash is a choice too, and usually an expensive one.
Raymond invested his cash that month. Shu Ting, who hadn't contributed yet, used his statement as a warning. She checked her bank's current SRS cash rate and wrote it down. Then she checked which funds her broker allowed with SRS money. The world equity fund she held in her normal account wasn't on the list. A different fund on a similar index was, so she noted that one, with its costs, to compare properly later using her ETF course notes.
She also decided that from now on, each December contribution would be invested in January, so that the cash never sat for more than a few weeks. She put a reminder in her calendar for the second week of January.
For the activity, find the interest rate your bank pays on uninvested SRS cash, and write down what you'd hold instead.
Check the interest rate on uninvested SRS cash at your bank and write what you would hold instead.
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