Many individuals in Singapore may overlook a powerful retirement planning tool – the Supplementary Retirement Scheme (SRS). While the scheme is available to all, it is essential to carefully assess your cash flow before committing to SRS account as part of your retirement strategy.
If you have a chargeable annual income tax of over SGD 160,000 which falls within a higher tax bracket, SRS can offer significant tax relief. However, there are also some complexities to be aware of. In this guide, we will explore five common mistakes people make with SRS and share three key strategies to help you maximise its benefits.
Common Mistakes with SRS
1. Early Withdrawals: The Costly Pitfall
One common mistake is treating the SRS account like a regular savings account. Many are unaware of the penalties for early withdrawals. Withdrawals made before reaching the statutory retirement age (currently 63 for accounts opened and funded in 2024) will incur a 5% penalty. Making matters worse, the withdrawn amount will be added to your total income for the year for tax assessment.
Unlike CPF, SRS allows for early withdrawal albeit with a penalty but it should only be considered in dire situations, such as sudden loss of job or extended sabbatical.
Tip to Avoid This Mistake:
Treat your SRS account as a long-term retirement savings tool. Only deposit funds you are confident you won’t need until retirement. Keep it separate from your short-term and mid-term financial goals.
2. Overlooking Investment Risks: Balancing Growth and Safety
A unique aspect of SRS is that it allows you to invest in various select financial products, from stocks to bonds and unit trusts. Some SRS account holders fall into two traps, investing too aggressively or too conservatively.
As the saying goes, ‘high risk, high return,’ and individual stock picking certainly carries that risk. As a professional, I always recommend a diversified approach across asset classes and advise against stock picking.
Let’s consider an example: if we start at age 40 and contribute $15,300 per year for 25 years, with the money compounding at 8% annually through a globally diversified unit trust, by age 65 we would have accumulated around $1.1 million. Keep in mind that the SRS account is a tax-deferred account, meaning that all withdrawals will be taxable at the prevailing income tax rates in the future.
On the other hand, if we simply keep the funds in the SRS account or invest in treasury bills, we may barely keep up with inflation. This approach would not allow us to build wealth effectively.
Both strategies have their drawbacks. The key is to aim for the best solution that suits our needs, rather than blindly pursuing one strategy over the other.
Tip to Avoid This Mistake:
Aim for a balanced investment strategy that matches your risk tolerance and retirement timeline. If you plan to retire one or two decades later, consider growth-oriented investments such as equities. As you approach your desired retirement age, shift your investment portfolio to include more stable or capital-guaranteed options.
3. Ignoring Tax Implications of Large Withdrawals at Retirement
One key benefit of SRS is that only 50% of withdrawals made after retirement age are subject to tax. If you have successfully grown the account into a large sum, withdrawing all at once could result in a high tax bill.
Tip to Avoid This Mistake:
Instead of withdrawing a large lump sum, plan for phased withdrawals. You have up to 10 years to withdraw the funds, so do not rush to take it all out immediately upon retiring. This approach lowers the taxation and also provides a steady stream of retirement income.
Also, consider other sources of retirement income, like director fees and rental income, which are also taxable.
4. Neglecting Regular Portfolio Reviews
Once SRS funds are invested, many tend to forget about them. Investors may assume their initial investment choices will be sufficient over the long-term. However, markets change, and so do your financial goals and risk tolerance over time. Neglecting regular portfolio reviews can lead to missed growth opportunities. or worse, holding poorly performing investments that may not meet your retirement needs.
Tip to Avoid This Mistake:
Schedule an annual review of your SRS investments. Assess performance, check and align with current market conditions if need be. Regular reviews will keep your SRS funds on track to meet your retirement goals.
5. Underutilising Tax Relief by Not Contributing the Maximum Amount
Anyone based in Singapore can take advantage of SRS’s tax-saving features. By contributing the maximum amount each year (SGD 15,300 for Singaporeans and PRs, SGD 35,700 for foreigners), you can significantly reduce your taxable income. Some people overlook this opportunity, either by contributing only a partial amount or not contributing at all.
Tip to Avoid This Mistake:
Make it a habit to contribute the full amount annually to maximise your tax relief. If your chargeable income tax is over SGD 160,000, your tax savings could exceed $2,200 a year.
How to Maximise Returns on Your SRS Account, it is not just about investment returns.
1. Apply a Diversified Investment Strategy
When it comes to maximising returns on your SRS account, diversification is key. Spread your investments across various products such as stocks, bonds, and unit trusts to reduce risk and mitigate the impact of poor performance in any single asset class. Rebalancing your investment portfolio regularly also helps to optimise performance.
Sample Strategy:
For someone in their 40s, a sample SRS investment portfolio could consist of 60% in stocks for growth and 40% in bonds for stability. This balance offers growth potential while managing downside drawdowns.
2. Plan for Phased Withdrawals to Minimise Tax Impact
To get the most tax-efficient benefit from your SRS, avoid withdrawing all funds all in one go. Instead, plan for smaller withdrawals in phases to limit the taxable portion of your income and potentially keep your total income within a lower tax bracket.
Sample Strategy:
Suppose you have SGD 600,000 saved in your SRS by the time you retire, instead of withdrawing it all, consider withdrawing SGD 60,000 each year. Only 50% (SGD 30,000) of each withdrawal is subject to tax, helping you stay within a lower tax bracket. Keep in mind that other income sources in retirement may also affect your tax status.
3. Review and Adjust Your Portfolio Regularly
Investments should evolve as market conditions and your personal circumstances change. Real estate investment trusts, (REITs), have a high chance of rights issues. You might not be able to collect more of those shares if you have already maxed out your SRS contribution for the year.
Sample Strategy:
As you approach retirement, shifting from a growth-focused portfolio to a more conservative one may be prudent. Reviewing your stock and bond allocations, and considering capital-guaranteed instruments, can provide greater stability as you near retirement.
Key Takeaways for everyone
The SRS account offers a unique opportunity to build retirement savings with tax advantages, but maximising its benefits requires thoughtful planning. By avoiding common mistakes, you can ensure that your SRS works for you, not against you.
Consult with a licensed financial advisor for solutions tailored to your needs. At Phillip Wealth Advisory, we take pride in offering a wide variety of solutions for our clients.
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