The Supplementary Retirement Scheme (SRS) is a voluntary tax deferment savings scheme in Singapore designed to encourage individuals to save for retirement while enjoying tax benefits. While it can be an effective tool for many, it is essential to recognize that SRS may not be suitable for everyone. Below, we explore several reasons why some individuals might find the SRS less advantageous for their financial situations.
1. Low Interest Rates
One of the most significant drawbacks of the SRS is the low interest rate offered on deposits. As of now, SRS accounts yield only about 0.05% annually. This rate is notably lower than inflation rates, which means that money held in an SRS account may lose purchasing power over time. For individuals looking for growth in their retirement savings, relying solely on the interest from an SRS account may not be sufficient.
Although individuals seeking higher returns may consider investing their SRS funds into stocks, bonds, funds or insurance endowment plans, not everyone is savvy enough to make investment decisions or has the risk appetite to stomach volatility. Investing in the wrong financial assets, businesses, stocks or companies could result in significant losses which are more detrimental than paying taxes.
2. Withdrawal Restrictions
The SRS imposes strict withdrawal regulations that can be a significant disadvantage for some savers. Withdrawals before the statutory retirement age (currently 63 years) are subject to a 5% penalty on the amount withdrawn, in addition to being fully taxable as income. This can deter individuals who may need access to their funds earlier due to unforeseen circumstances such as medical emergencies or job loss.
Upon withdrawal of SRS funds after reaching the retirement age, 50% of the withdrawn amount is subject to income tax. Withdrawal can be in a lump sum or spread over a maximum of 10 years.
While we could strategise on minimising the incurring of income taxes from SRS, we are unable to avoid paying tax totally despite all the efforts.
3. Limited Flexibility and Autonomy over own money
Akin to Central Provided Fund (CPF) accounts, our funds stashed away in SRS becomes illiquid.
For those who prioritize liquidity and flexibility in their financial planning, other savings or investment options may be more appropriate. High interest savings accounts, annuity plans, robo-advisor managed investment portfolios or even self investments could generate higher returns to even offset the taxes incurred from controlling our own money saved from our main income.
4. Cash is King
The SRS requires contributions to be made exclusively in cash, which can limit participation for those who may not have sufficient liquid assets or value Cash as King.
Individuals with significant investments or commitments in property or stocks are not able to easily stake or liquidate these assets just to make contributions to their SRS accounts.
It may be more important to maintain our active cashflows for daily expenses and war chest for investment opportunities in the next property or stocks.
We can consider CPF Voluntary Contributions to Medisave or Retirement Sum Top-Up to own CPF Special Account to enjoy tax relief before considering top-ups to SRS.
5. Tax Efficiency Considerations
While one of the main attractions of the SRS is its tax benefits—contributions are tax-deductible and withdrawals are taxed at only 50%—this advantage may not be significant for everyone.
Individuals in lower tax brackets may find that the tax relief provided by SRS contributions does not outweigh the penalties and restrictions associated with early withdrawals.
Before committing to an SRS account, individuals should assess their current and projected income levels. Lower Income Individuals earning below a certain threshold may benefit more from other tax-saving instruments i.e. CPF top-ups, course reliefs, donations etc.
Exploring investments that provide capital gains or dividends can sometimes offer better after-tax returns than the SRS.
Conclusion
The SRS presents a valuable opportunity for many in Singapore looking to enhance their retirement savings while enjoying tax benefits. However, it is crucial to recognize that it may not be suitable for everyone due to its low interest rates, efforts required to manage investments, withdrawal restrictions, cash-only contribution requirement, and varying tax efficiency based on individual income levels.
Before deciding whether to participate in the SRS, individuals should carefully evaluate their financial goals, liquidity needs, and overall investment strategy. Consulting with a financial advisor can also provide tailored advice that aligns with personal circumstances and long-term objectives. Ultimately, making informed decisions about retirement savings will lead to a more secure financial future.
Disclaimer: This article is for informational purposes only and does not constitute financial advice. It's crucial to conduct your own research or consult with a qualified financial advisor before making any investment decisions.
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