It is the time of the year when the focus is on the Supplementary Retirement Scheme (SRS) again as the deadline for contributing to the SRS draws closer.
Despite the benefits that come with the Supplementary Retirement Scheme (SRS), it is often overlooked as some find it difficult to understand how the scheme works.
In a snapshot, the SRS is a voluntary scheme to encourage us to save for retirement, over and above our CPF savings. Each dollar of SRS contribution will reduce our income chargeable to tax by a dollar in the next Year of Assessment (YA). In addition, only 50% of the withdrawals from SRS are taxable after retirement age and investment gains in SRS accumulate tax-free before withdrawal.
How can we benefit from SRS?
We illustrate using an example.
Enjoy Tax Savings
Assuming you have a taxable income of $72,000 before tax-relief from SRS,
Tax payable on $72,000 = $550 (on first $40,000)* + $2240 (7% X $32,000)*
If you contribute $15,300 in SRS by 31st December 2017, you can claim $15,300 of tax relief in the Year of Assessment (YA) 2018.
Your taxable income would be= $72,000 - $15,300 (tax relief enjoyed) = $56,700
Tax payable on $56,700 = $550 (on first $40,000)* + $1169 (7% X $16,700)*
Your tax savings with SRS = $2790-$1719 = $1,071
To calculate how much tax savings you enjoy by contributing to SRS, use this useful calculator by OCBC here.
*Based on IRAS’ current income tax rates and brackets
**Please note that from the Year of Assessment 2018 (when income earned in 2017 is assessed to tax), there is a personal income tax relief cap of $80,000.
At retirement age, you can spread withdrawals from SRS for up to 10 years.
If you have saved $400,000 in SRS at age 62, you can withdraw $40,000 each year over 10 years. Since 50% of withdrawals are not taxable with SRS, only $20,000 (50% x $40,000) is taxable.
Based on current tax rates, the first $20,000 is not taxable and hence you do not have to pay any taxes if you have no additional income.
Important Pointers about SRS
There are some key areas about contributing and withdrawing from your SRS account that would be useful for you to know if you are considering to make use of it.
The current cap of contribution to SRS each year for Singaporeans and PRs is $15,300. All SRS contributions must be made in cash and contributions can be made any time and any number of times in a year before 31 December each year to enjoy tax reliefs in the Year of Assessment (YA) the next year.
Withdrawal after reaching statutory retirement age** (currently 62) or on medical grounds/death:
Withdrawal before reaching statutory retirement age** or in other situations:
50% of these withdrawals will be tax-exempt in the Year of Assessment (YA) following the year of withdrawal.
100% of these withdrawals will be subjected to tax
From the first withdrawal, you will have up to 10 years to withdraw the full amount. You may withdraw as many times as you wish without any penalty.
5% premature withdrawal penalty on the sum withdrawn will be imposed, unless withdrawal is made under exceptional circumstances
No further contributions to SRS is allowed after the 1st withdrawal is made.
Further contributions to SRS is still allowed
Since SRS is a scheme to encourage us to save for retirement, you will notice there are benefits when withdrawing after reaching retirement age and penalties imposed for withdrawals before retirement age. It is important that you withdraw from our SRS account only when you have reached retirement scheme if you intend on contribute to SRS.
How can I get started?
If you are keen to enjoy tax-savings using SRS, it is not difficult. Here are the steps to get started:
You can invest your SRS in shares, bonds, unit trusts, fixed deposits and insurance products from financial institutions to gain a better return on your monies contributed into your SRS account. Monies left in SRS account earn an interest of 0.05% p.a currently as offered by the 3 banks.
IRAS will grant the tax relief to you automatically in the year following the year of contribution provided, based on information provided by the SRS operators.
I hope this article has been useful for you to understand the features and benefits SRS. In the next article, we share about options you can consider to grow your SRS.
As we draw nearer to the end of the year, don't forget to contribute to your SRS 31st December 2017 to enjoy tax relief in Year of Assessment (YA) 2018!
Visit the Supplementary Retirement Scheme Webpage by the Ministry of Finance for more details.
SRS reduces your taxable income by the same amount contributed to your SRS account. The contribution cap per years is S$15,300 for Singaporeans and PRs.
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