In order to understand what can be invested in using your SRS money, you will first need to understand how the SRS account works and how it can complement in your retirement planning Singapore and tax planning as well.
Supplementary Retirement Scheme (SRS) is basically part of the Singapore government strategy to address the financial needs of a greying population by helping Singaporeans to save more for their old age. How different it is from Central Provident Fund (CPF) is that CPF funds are catered for housing and medical needs and it is compulsory. For SRS contribution is voluntary. The amount one can contribute varying as it is subjected to a cap.
The minimum age to open an SRS account is 18. The prevailing cap is $15,300 a year for Singaporeans and permanent residents and $35,700 for foreigners.
Tax benefits will the obvious reason why you do a contribution to the SRS as it is attractive on the amount of tax you can potentially save especially you are a high-income earner.
Eg: Your annual income is $150,000. You will need to pay $7950 on the first $120,000 and 15% on the next $30,000 which is $4500. A total of $12,450 on tax.
Assuming that you top up the maximum amount to SRS account which is $15,300 currently. Now Tax payable is $7950 on first $120,000 and 15% on the next ($30,000-$15,300) = $2205. So with SRS account your tax will be $10,155. You save a total of $2295 a year. That can come up to a huge amount imagine you are age 40 and working till 62. You will be saving $2295 * 22 years = $49,830. This is amount now plays a part in your retirement planning.
You may want to take a look a the two cases studies to get a breakdown of the numbers.
*To take note, the contribution to srs are eligible for tax relief and subject to a cap on personal income tax relief of $80,000 per year.
The interest rate for an SRS account is 0.5 percent a year which is similar to the typical savings account.
Topping up SRS account is like step 1, where most people stop. Hence you have to make use of the investment instrument available for SRS account to enhance the return slightly to hedge against inflation since you can only withdraw after age 62. The investment that you can use SRS account to invest are bonds, Unit trust, fixed deposits.
Like all investment, it is always good to diversify your portfolio especially when you can only touch the SRS funds at your retirement age which is currently at age 62. One wrong investment decision may potentially affect your retirement plans so be wary. Here are 3 things you need to know before you invest
A guaranteed stream of income (Annuity)
Using the amount in the SRS account to purchase an annuity complement very well with SRS as there is an accumulation period for an annuity which is in line with the non-withdrawal period of the account. The withdrawal amount of the annuity will be allowing you to plan your retirement with clarity as it is a guaranteed monthly income which adds on to your CPF life.
Returns from the investments using the SRS funds will not be taxable withdrawal. And only 50% of SRS withdrawal after the retirement age are taxable. It is most likely that you will pay no or little tax especially if you have little income during your retirement.
If you know more about how SRS account can help you save your tax or wish to find out more on how to plan for retirement in Singapore. Click the link below to get the free calculator to know your real savings.