Managing Tax Liability while Saving for Retirement July 30, 2020
Benjamin Franklin once said: “In this world nothing can be said to be certain, except death and taxes.”
In Singapore, tax is unavoidable. No matter what you buy, there is a GST (i.e. Goods and Services Tax) imposed on it. If you earn an income of more than $20,000 a year, you are subjected to the personal income tax. In Year of Assessment 2018, 1.83 million of our population paid tax in Singapore for YA 20181. As long as you earn a decent income, paying tax is a certainty in life.
How about death? Everyone will die one day, so death is certain too. Ideally, a person gets to retire and enjoy before he dies of old age. Retirement can be considered a certainty as well, unless one dies of pre-mature death. According to an article in Today’s Paper on 15 Jul 2019, up to 65% of Singaporeans are behind in making their retirement plans2.
Since retirement and death can both be anticipated, wouldn’t it be nice if we could combine them i.e. manage tax liability while saving for our retirement?
The scheme which I am introducing to you is SRS – Supplementary Retirement Scheme.
There are many ways to save for retirement. Some prefer to keep cash in a bank and others may prefer to invest in stocks, unit trust, bond or insurance products. If you wish to enjoy the tax saving, parking your money in SRS allows you to achieve your investment objectives and enjoy tax savings at the same time.
The SRS is a government scheme operated by the three local banks: DBS, OCBC and UOB. The idea is for you to enjoy immediate tax savings when you contribute into the scheme. Unlike the mandatory CPF scheme which is tax exempted, SRS is voluntary and tax deferred, which means each dollar you contribute reduces your taxable income in the year and only 50% of the amount withdrawn at statutory retirement age (currently 62), will be taxable. There is an annual contribution cap of S$15,300 for Singaporeans and $35,700 for foreigners. However, if you withdraw before 62, there is a penalty of 5% on the withdrawal3. With proper planning on withdrawal, you can minimise the amount of tax payable substantially.
Let me give you an example to illustrate the points.
A Singaporean, age 41, is single and earns an annual income of $80,000 a year. After deducting his earned income relief, NS man relief and CPF relief, his chargeable income is $63,100 and his tax liability is $2,167. However, if he were to contribute the maximum $15,300 into his SRS, his tax liability is now only $1,096. He gets to save more than $1,000 (or 50%) with minimum effort.
| Without SRS | With SRS | |
| Employment Income | $80,000 | $80,000 |
| Less: | ||
| Earned Income relief | $1,000 | $1,000 |
| CPF Relief | $14,400 | $14,400 |
| NS man Relief | $1,500 | $1,500 |
| SRS | $0 | $15,300 |
| Total Relief4 | $16,900 | $32,200 |
| Chargeable Income | $63,100 | $47,800 |
| Tax Payable | $2,167 | $1,096 |
| Tax Saved | $1,071 | |
| % | 49% | |
He continues doing so until he turns 62. On top of his tax savings of $23,562 ($1,071 x 22 years) over the years, he would have contributed $336,600 ($15,300 x 22 years) into his SRS account. If he invests and earns an average return of 4% per year, he would have earned $187,394. In total, he would have accumulated over $500,000 for his retirement when he reaches 62. This is an assumption. He can earn higher or lower returns depending on the investment product he chooses.
| Total Retirement Sum (from age 41 to age 62) | |
| SRS Contributions $15,300 x 22 years | $336,600 |
| Investment returns @ 4% per year | $187,394 |
| Total | $523,994 |
He can start to withdraw from his SRS account over 10 years and receive an income of $50,000 per year. Assuming he does not have other income source at retirement, only 50% of the SRS income, which is $25,000 is subject to tax. The first $20,000 is tax free and after deducting the personal reliefs, his tax liability is only $50 a year.
| Withdrawal per year | $50,000 |
| 50% taxable | $25,000 |
| Earned Income relief | $1,000 |
| NS man Relief | $1,500 |
| Chargeable Income | $22,500 |
| Tax Payable | |
| 1st $20,000 | Nil |
| Next $2,250@ 2%5 | $50 |
Comparing to the benefits that he achieves, this $50 of tax liability would have been negligible.
This is a simple and easy scheme which is applicable to everyone. Start your tax planning while saving for your retirement now. If you missed the contribution by 31 Dec, there is no backtrack for the year and you can only do it for next year. Act Now before it is too late.
Contributor:
Ang Bee Choo
Financial Service Manger
Chartered Accountant (Singapore) CA
Chartered Financial Consultant ChFC
Associate Estate Planning Practitioner AEPP
Phillip Securities Pte Ltd
Email address: angbc@phillip.com.sg
Reference:
- [1] https://data.gov.sg/dataset/taxable-individuals-by-assessable-income-group-annual
- [2] https://www.todayonline.com/singapore/most-singaporeans-behind-retirement-plans-many-unsure-how-grow-wealth-study
- [3] https://www.iras.gov.sg/irashome/Individuals/Locals/Working-Out-Your-Taxes/Special-tax-schemes/Supplementary-Retirement-Scheme–SRS-/Tax-on-SRS-withdrawal/#:~:text=at%20age%2061.-,The%20amount%20standing%20in%20his%20SRS%20account%20is%20%24400%2C000.,contribution%20is%2062%20years%20old.&text=As%20it%20is%20a%20premature,a%205%25%20penalty%20is%20applicable.
- [4] https://www.iras.gov.sg/irashome/Individuals/Locals/Working-Out-Your-Taxes/Deductions-for-Individuals–Reliefs–Expenses–Donations-/#:~:text=Back%20to%20top-,Personal%20Income%20Tax%20Relief%20Cap,have%20met%20the%20qualifying%20conditions.
- [5] https://www.iras.gov.sg/IRASHome/Individuals/Locals/Working-Out-Your-Taxes/Income-Tax-Rates/
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About the author
Ms. Ang Bee Choo
Financial Service Manger
Associate Estate Planning Practitioner AEPP
Bee Choo is a Chartered Accountant (CA) who joined the financial planning industry in the year 2003. In the past 17 years, she has achieved numerous Million Dollar Round Table accreditation (MDRT) and has moved to a management position leading a team of financial consultants. She believes in continuous learning and has obtained Chartered Financial Consultant (ChFC) and Associate Estate Planning Practitioner (AEPP) qualifications over the years, improving her skills to benefit clients with holistic financial planning. Her areas of expertise include providing advice on personal insurance, investments, securities, brokering general insurance and marketing Managed Account services. Being licensed as an Estate Planning and Succession Practitioner in 2015 has also enabled her to facilitate legacy planning for clients and complete the last lap of their financial planning journey.
