Using SRS for Tax Minimization

To encourage saving for old age and life after retirement, our government introduced Supplementary Retirement Scheme in 2001 which uses tax deferment as an incentive for Singaporeans to plan for their twilight years.

This scheme benefits tax paying Singaporeans by allowing them to set aside a certain amount of their savings (subject to a cap of $12,750 for 2005) in special account, SRS and this amount would be entirely tax deductible until statutory retirement age, which the contributor can withdraw over 10 years and tax at 50% of the withdrawal. Any premature withdrawal (before 62 years) would be taxed at 100% and an additional 5% is imposed by IRAS.

At a glance, SRS is attractive to income earners who fall in the higher tax brackets. An immediate return equivalent to one's tax rate is achieved upon depositing funds into this account. The money in the SRS can be used to many types of investments except for direct property investment.

One consideration that one has to make (assuming there is no issue on premature withdrawal due to emergency) is how to utilise this money while parking in the SRS. Noted that any returns on investments from SRS funds is returned to this account and at thte point of withdrawal, 50% of the withdrawn amount is taxed. Hence, even though capital gain is not taxed in Singapore, by investing from SRS, the gain is in a way taxed at 50% of one's tax rate when it is withdrawn. Hence, personally I would not be overly inclined to use SRS for aggressive investment but for simple and predictable ones e.g. FD or T bill or SGS bonds. The objective will be to achieve higher returns than the savings account interest rate.

When comparing to voluntary CPF contributions, SRS may be preferred in terms of fexibility of withdrawing the money for emergency use e.g. when retrenched, when in such situation, probably the tax rate is zero due to no income, but penalty of 5% remains. However, if one's objective is for financing housing needs, then SRS is not suitable.

Lastly, one potential cost of using SRS is that it is operated by private sector which may impose service charges in the future although presently it is waived.

I shall make my moves cautiously in planning my retirement nest by investing in various asset classes and tax planning, including:

1. Predictable/ stable income instrument
- FDs
- REITS
- T bills & Bonds
- Dividend income from stable companies
- Endowment

2. Capital gains
- Stocks
- Unit trusts

3. Tax planning
- SRS

4. Personal/ Asset Protection
- Life insurance
- Housing insurance

5. Minimise commercial loans
- Finance asset with cash where possible

http://www.wallstraits.com/community/viewthread.php?tid=1275&page=1 - Forum on SRS

http://www.iras.gov.sg/ESVPortal/iit/iit-se-a1.1.10.1+srs.asp - IRAS on SRS

http://www.iras.gov.sg/ESVPortal/iit/iit-se-a1.1.6.11+relief+cpf+cash+top-up.asp - IRAS on CPF Top-Up

Information from CPF
Voluntary Contributions for Non Self-Employed via E-Payment CPF/3AC

1. For eligibility, you must be a Singapore Citizen or Singapore Permanent Resident. Payment of voluntary contributions is non-refundable.

2. The annual cap on payment of voluntary contribution(VC) is S $28,050 (inclusive of mandatory contributions(MC)) with effect from 1 January 2005. For eg: If MC = $20,000, maximum VC allowed = S $8,050 (S$28,050 - S$20,000) If MC = $28,050, no VC is allowed 3. Any excess voluntary contributions will be refunded without interest.

4. The voluntary contributions are subject to the existing tax rules. You may contact the Inland Revenue Authority of Singapore if you require further clarification.

5. To use this service, you must have internet banking service with UOB, DBS or Citibank. Kindly note that the minimum VC payment via this service is $10.6. To check if your voluntary contributions has been credited to your account, please login to My CPF Online services with your SingPass 4 working days later.