A Ticket to Retirement with ETF and SRS March 5, 2019

According to the Ministry of Finance in 2017, 34% or about $2.34 billion of Supplementary Retirement Scheme (SRS) funds are lying idle as cash[1]. Instead of letting your SRS funds lay idle, there is a range of SRS-approved investment products that allow you to maximise the funds in your SRS account.

In this article, we will learn more about SRS and the reasons to invest in Exchange-Traded Funds (ETFs) with your SRS funds for your ticket to retirement.

What is Supplementary Retirement Scheme (SRS)?

SRS is a voluntary savings scheme that complements the Central Provident Fund (CPF) savings for retirement. It is a scheme by the government to help address the financial needs of an ageing population by enabling the population to save more for their retirement.

How can I participate in SRS?

Any Singapore citizens, Singapore permanent residents and foreigners who derive any form of income and fulfil the following criteria are eligible to open a SRS account:

  • At least 18 years of age
  • Not an undischarged bankrupt
  • Not suffering from a mental disorder
  • Capable of managing yourself and your affairs

Qualified individuals can open an SRS account with any one of the three SRS operators in Singapore: DBS, OCBC and UOB. Account holders can contribute to their SRS account anytime, subject to a maximum yearly contribution of $15,300 for Singaporeans / PRs and $35,700 for foreigners.[2]

Components of SRS

Contribution Investment Withdrawal
Contribute to your SRS account and earn dollar for dollar tax relief up to the maximum annual contribution Invest the fund into SRS approved financial products (Shares, REITs, ETFs, Unit Trusts and Insurance) Investors can withdraw from their SRS account upon reaching the statutory retirement age of 62
Funds in SRS account earns 0.05% interest per annum Investment returns will depend on the nature and characteristic of the respective financial products Investors have up to ten years to withdraw the full amount and withdrawals are penalty free. 50% of the withdrawals from SRS are taxable at retirement
Gains made from investment through SRS have to be returned to the SRS account Investors need not liquidate their assets upon withdrawal and can choose to withdraw the assets from their SRS accounts into their CDP accounts
Accumulated investment gains are tax-free until withdrawal Withdrawal before statutory age will be subjected to a 5% withdrawal penalty charge and 100% of the fund will be taxed accordingly.
Penalty charge will be waived under exceptional circumstances[3]

Unlike the CPF Investment Scheme where there are only four CPF approved ETFs, there is no restriction on the use of SRS funds to purchase the 51 ETFs listed on SGX.

Below are five reasons why ETFs are suitable for investors looking for long-term investment products for their retirement needs.

Five Reasons to Invest in ETF Using SRS Account

1. Wide Variety of ETFs Available

The wide variety of different asset classes of ETFs (Fixed Income, Equities, Money Market, REITs and Commodity) available on SGX allow investors to choose the ETF that best suit their investment needs. Investors who are looking for capital gain can consider Equity ETFs (eg. STI ETF, S&P 500 ETF). Investors desiring passive dividend income can look towards REIT ETFs or Bond ETFs (eg. ABF SG Bond ETF, DBXT Au Govt Bond). Novice investors can use ETFs to build up their investment portfolio whereas experienced investors can use ETFs to complement their existing portfolio.

Investors can adopt the Core-Satellite Approach towards portfolio construction via the use of ETFs. For the core portion of the portfolio, low-cost Broad Market Index ETFs of various regions and ETFs of different asset classes are utilised to diversify and modify the portfolio’s characteristics according to the investors’ objectives. The ETFs will be strategically allocated and are intended to be passively managed by the investors.

Figure 1: Sample Strategic Allocation of Asset Classes Based on Risk Profiles

Factsheets

Investors can learn more about strategic asset allocation at “A Guide to Portfolio Construction with ETFs”.

Unlike the core portion of the portfolio, the goal of the satellite portion is to provide a tactical opportunity for investors to earn greater returns than those generated by the passive portion of the portfolio. ETFs are ideal vehicles to be used as “Satellite” because they allow investors to gain exposure to specific market trends or themes rapidly.

Figure 2: An illustration of the Core-Satellite Approach using ETFs

Factsheets

2. Liquidity and Flexibility

ETFs offer liquidity and flexibility to investors. ETFs are traded intraday on the stock exchanges with full price transparency. Investors can enter the market whenever they spot an investment opportunity or exit the market whenever they wish to liquidate their assets.
The yearly contribution for SRS is cap at $15,300 for locals and $35,700 for foreigners. Hence, the capital available for investors in their SRS account is limited to this yearly contribution. With ETFs, investors’ SRS funds are not locked into a financial product (eg. Fixed Deposits) and they can have the flexibility to better allocate their limited capital whenever the need arises.

3. Low Expense Ratio

Expense ratio refers to the total cost of managing and operating an investment fund. It is also a measure of the total cost of a fund to investors. It comprises of management fees, legal fees, auditor fees, trading fees and other operational costs.

The total expense ratio of ETF is generally lower as compared to other professionally managed funds like Unit Trusts. This is because ETFs follow a passive strategy by replicating the performance of the index that it is tracking. For example, The Straits Times Index ETFs (SPDR STI ETF and Nikko AM STI ETF) comprise of the 30 constituents that make up the STI and the ETFs’ performance will be correlated to the performance of the STI.

To illustrate, if 20% of the funds invested in Unit Trusts in Singapore were to be invested in ETFs instead, the cost savings from the differential in expense ratio between the two different financial products would amount to around $60m per annum for investors.[4]

Thus, with a low expense ratio, ETFs are ideal for investors who wish to hold their investment over a longer-term period. High expense ratio will erode the investment returns over the long term.

4. Longevity of Index

ETF’s fund managers will rebalance the constituents of the ETFs to achieve the goal of replicating the performance of the index. Better-performing companies will replace weaker companies to conform to the objective and criteria of the index. In summary, conglomerates may rise and fall but the index will always remain.

For example, the Dow Jones Industrial Average Index (DJIA), which comprised of only twelve industrial companies, was constructed on 28 May 1896. Today, none of the companies remains inside the index and are replaced by other conglomerates like Apple, Nike, and Coca-Cola.

Hence, ETF is a suitable investment instrument for investors who do not have the time nor the expertise to monitor their investment. They can adopt a passive approach towards investing, as fund managers will rebalance the ETFs accordingly to the investment objectives of the ETFs on behalf of the investors.

5. Investment Option for Idle SRS Funds

The current interest rate for SRS account is 0.05% per annum. Compared to CPF Ordinary Account’s interest rate of 2.5% and CPF Special Account’s interest rate of 4%, the opportunity cost of using SRS funds to invest is lower. Instead of letting their funds lay idle, investors desiring a higher return on their SRS funds can consider investing in ETFs for its potential long-term capital appreciation and/or for its dividend yield.

However, unlike the SRS risk-free interest rate, investors must prepare for the possibility of paper loss if market conditions are unfavourable. To compensate for the additional risk undertaken by investors, ETFs generally provide a higher return than the risk-free interest rate offered by SRS.

Conclusion

ETFs allow investors to diversify and gain exposure to the respective indices. Investors can allocate different asset classes of ETFs to their portfolio according to their investment needs, risk profile and time horizon.

The low expense ratio and longevity of index make ETFs suitable for long-term investment and retirement preparation. Investors can keep their ETFs indefinitely for as long as the ETF is listed and there is no maturity date for ETF.

For example, most bonds have a maturity date where investors will receive back their principal amount invested. Investors are thus subject to reinvestment risk when they reinvest their principal into another financial asset. Unlike bonds, bond ETFs rebalances constantly by replacing matured bonds with new bonds and are suitable for investors to buy-and-hold indefinitely.

Being listed on the stock exchange, ETFs offer investors the opportunity to enter or exit the market whenever they deem fit. Gains made from investing on ETFs are returned to the SRS account whereby investors can further use their SRS funds to build up their retirement nest egg.

Reference:

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About the author

Mr. Joel Lim
ETF Specialist

Joel graduated from Singapore Institute of Management, University of London with a First Class Honours in Business. He was the recipient of SIM University of London’s Top Student Bronze Award in 2017 and was the worldwide examination topper for the “Financial Management” module in 2016. Joel was also commended by University of London for his excellent performance in the 2014 Examinations.

Joel is involved in ETF education, providing trading ideas and support to traders, dealers and fund managers. Joel also works closely with ETF issuers to educate retail investors about new ETFs during the Initial Offering Period.

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