You will be able to judge whether an SRS contribution is likely to leave you better off.
Find the tax rate on the top slice of your chargeable income for this year. If you filed last year and your pay hasn't changed much, last year's figures are close enough. This is the first of two rates you need before you can judge whether putting money into SRS saves you tax, does nothing, or costs you.
Darren has worked through three lessons on SRS and understands how the scheme works. Every December his staffroom argues about whether it is worth it, and he still has no answer for himself. His sister, Shu Ting, is asking the same question. Her answer is different from his, and the reason fits in one sentence: SRS saves tax when the rate you save on contribution is higher than the rate you pay on withdrawal.
The first rate is your marginal rate: the tax rate at which each dollar you put in saves tax. IRAS allows SRS tax relief in the Year of Assessment (YA) following the year you contribute, and only if you are a tax resident for that YA. As Lesson 4.1, How SRS works and who it suits, showed, each dollar saves tax at your marginal rate, provided the contribution does not take you down into a lower band. If a large contribution would cross into a lower band, part of it saves tax at that lower rate instead.
The second rate is your effective withdrawal rate: the tax you pay on SRS money when it comes out, as a share of everything you withdraw. It depends on two things from Lesson 4.3, The tax on withdrawal, and what early withdrawal costs. The first is the share of each withdrawal that IRAS treats as taxable. The second is the rate that taxable part is taxed at in the years you withdraw. If you spread your withdrawals and have little other taxable income in retirement, much of the taxable part can fall in the zero band, so your effective withdrawal rate can be very low, even zero. The course Retirement & Estate: income for life and a plan for what you leave covers how to time those withdrawals.
Once you have both rates, the comparison is simple. If your rate now is higher than your rate later, SRS wins. If they are equal, SRS makes no difference. If your rate later is higher, SRS costs you money.
To size the gain, assume you would invest the money the same way inside SRS as you would outside it. On that assumption, the gain from SRS over investing the same income outside after tax is the difference between your two rates, applied to the grown balance.
Say Darren and Shu Ting each contribute S$10,000 (example figures throughout this section). Assume the money grows at 4% a year for thirty years, a growth multiplier of about 3.24. That gives an SRS balance of about S$32,434. Assume an effective withdrawal rate of 1.5% for both of them. The tax on withdrawal is then about S$487, which leaves S$31,947.
Shu Ting's marginal rate is 6% under the practice table. Without SRS, her S$10,000 would be taxed at 6%, leaving S$9,400 to invest outside. At 4% for thirty years, that grows to about S$30,488. With SRS she ends up S$1,459 better off. Her rate gap is 4.5 percentage points, and 4.5% of S$32,434 is that S$1,459.
Darren's marginal rate is 3%. Without SRS he would have S$9,700 to invest outside, which grows to about S$31,461. With SRS he is S$486 better off. His rate gap is 1.5 percentage points, so his gain is a third of Shu Ting's.
The gain then has to be weighed against the lock-up. Money in SRS cannot be used for a home, a career break or an emergency without penalty until statutory retirement age. Darren's S$486 is the reward for thirty years of locked money, and for it he gives up flexible use of S$10,000. A tax gain that small may not justify the lock-up. Darren concludes that at 3%, SRS does not do much for him yet. He plans to look at it again when his income rises or when he is clearer on where his retirement money should sit.
Shu Ting already has her emergency fund in place. With a gain three times the size, she concludes SRS is worth modelling properly, which is what she does in Lesson 4.5, Model one SRS contribution over its life.
Check whether any of these apply to you before contributing:
Your chargeable income is in the zero band. A contribution saves you nothing now, so any tax above zero on later withdrawals means SRS costs you money. You are in a low band now and expect decent income in retirement, for example from rental income. Your two rates may be close and the gain small. There is a real chance you'll need the money before statutory retirement age. Under the early withdrawal rules in Lesson 4.3, the whole amount is taxable and a penalty applies, which can turn a tax saving into a loss. You plan to leave the SRS money in cash. As Lesson 4.2, What to hold inside your SRS account, explained, inflation can take far more than the relief gave you.
If you are a foreigner, or might leave Singapore before retirement, you need one more check. How your SRS withdrawals are treated depends on your situation at the time you withdraw: whether you are still a tax resident, whether you meet the conditions IRAS sets for its exception for a full withdrawal of the SRS balance by a foreigner, and whether tax is withheld from withdrawals made while you are a non-resident. The country you move to may also tax the money.
Arjun, Shu Ting's colleague from Lesson 1.2, Tax residency and what it changes, is in this position. He read the IRAS pages on SRS for foreigners before contributing and decided to wait until he knew whether he would stay in Singapore. If this applies to you, read those IRAS pages first, and if the sums are large, ask a tax adviser.
For the activity, write down your two rates: your marginal rate today, and your honest guess at the rate you'll pay on withdrawals.
Write down your marginal rate now and the rate you expect to pay on withdrawals. Then write whether SRS looks worth it for you.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).