The Supplementary Retirement Scheme

Coming across today’s Straits Times Invest Section, the front page caught my eye:

The Supplementary Retirement Scheme (SRS)

‘SRS is a voluntary scheme to encourage individuals to save for retirement, over and above their CPF savings.

The SRS offers attractive tax benefits. Contributions to SRS are eligible for tax relief. Investment returns will also be tax-free before withdrawal and only 50% of the withdrawals from SRS are taxable at retirement.”

So SRS is the old CPF brought forward again. It’s what CPF was supposed to do: Help you retire. Until all the additional hooha about HDBs came into practice.

So is the SRS a thing to take note, or is it just another government sham?

The SRS can be seen as an optional contribution by you and your employer, which will appreciate in the hopes that it will be enough for your retirement in the future. Think mutual funds set up by the government. And there you have a basic picture of the SRS. However, one thing to note is that ‘contributions are eligible for tax relief’. This ups the game a little. This includes investing your money and getting tax relief at the same time.

The drawback, however, is that this only applies to high income earners. As quoted from

“SRS contributions are tax-free up to $11,475 per year, but only for money that goes in. Unlike the Central Provident Fund, you must pay taxes – on half the money – when it comes out. Withdrawals are over a 10-year period beginning at the statutory retirement age, which is now 62.”

This might even lead to YOU paying more taxes with a unstable income.

So will it lead to a lot of savings?

Short answer: Not really. You need to do your own calculations and to gauge the entire process.

Long answer (as quoted from the stforum blog again):
“First, the article explains that withdrawals before age 62 entail a 5 per cent penalty plus taxes on 100 per cent of the money withdrawn, which ‘includes whatever capital gains you might have made from your investments using your SRS funds’.

Actually, non-early withdrawals also entail a capital gain tax. SRS also taxes dividends and interest. All of these are normally tax-free.
Second, the article says: ‘For a person with a taxable income of $100,000, a $10,000 contribution works out to him paying $1,400 less tax based on current tax rates.’

Yes, but that is only one side of it. It’s the tax savings when you put money in. How about when you take the money out? Could you pay even more taxes then?

Yes. Suppose $10,000 per year goes into the SRS from age 22. At 7per cent interest, it will grow to $2million by age 62 and one would withdraw roughly $200,000 per year for 10 years and pay taxes on half, which is $100,000 per year.

[If you’re making $100k at age 22. I think that qualifies as rich.If you can consistently get 7% interest for 40 years, you are incredibly savvy investor. This is about what the highly risky mini-Bonds were offering. Now either 7% returns incurs that kind of risk, or the mini-Bonds were wrongly assessed in terms of risk. But at this point there are few investments that can steadily offer that kind of returns. And if you can withdraw $200k per year for your retirement out of a nest egg of $2m, I think you rank in the well-off if not rich category. Most likely, a 22 year old will not be making enough to contribute to the SRS. There are too many discretionary expenditure at that stage in life. Even at 35, most people may not have the means to save to the SRS consistently. But never mind.]

It incurs total taxes of $7,100 x 10 years = $71,000, which exceeds $1,400 x 40 years = $56,000 in tax savings.

[I don’t know how he arrives at $7,100 taxes per year for 10 years, but for a so-called financially-savvy adviser, he totally ignores concepts of present values and future values. Put another way: Would you agree to have $56k now which you don’t have to repay for 40 years, and at the end of 40 years, you will pay back $71k in fixed installments of 10 years. Ok, that’s not exactly fair either. It should be $1,400 per year for 40 years, after which you pay back $7,100 per year for 10 years. Note that this $71,000 is based on his computation that said saver/investor will turn $400,000 to $2m over 40 years based on an investment return of 7%. I suspect that the figure will work out to less than that for most people because they will save for less than 40 years, and their returns will be less than 7%. ]”


Furthermore, the age of 62 to withdraw your savings is too long! Especially for us who plan to retire early. If you withdraw too early, you end up losing more than what you plan to save.


So in short, this ‘ingenious scheme’ is destroyed by the very thing it was trying to prevent: taxes. Long story short, be wary of what you invest in, and always do your research before you dive into any investments, even after you read about something on the newspaper. Especially if it’s created by the government.



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