The Supplementary Retirement Scheme (SRS) seems like a cool financial phrase to utter these days. From the most recent Sunday Times which had two articles espousing the benefits of SRS to the latest blog post from esteemed personal finance blogger AK71 regarding an SRS promotion, everyone is talking about it. In fact, there’s even a blog that chronicles an SRS portfolio!
And many other Singaporeans are getting in on the act too. Especially since according to that report in the papers, there’s >80,000 people who have OPENED (which also doesn’t necessary mean putting in money) accounts with the three local banks. So it should be something beneficial for you and me too, right?
But first, what is SRS exactly?
If CPF funds are supposed to only provide for a BASIC retirement, then SRS is the additional layer for those who feel that CPF LIFE/Minimum Sum payouts are inadequate. Since these people are likely to be high income earners, the government designed a complementary scheme based on tax incentives. So voila, the SRS was born!
And basically, yours truly can benefit from the SRS since I would receive $700 worth of tax exemptions if I channeled $10,000 of cash into an SRS account before 31 Dec this year. And if I do this for the next 35 years or so, the tax savings would slowly add up. Withdrawing them over the next 10 years after I turn 62, the math indicates that it’s likely that I don’t have to pay taxes on them then.
For more detailed information, you can also refer to here.
However, like most government schemes, this isn’t a free lunch for most people. There are some downsides and they are especially significant and applicable to me.
Long period of lock-in
From now till I reach 62 years old is a good 35 years away. So subscribing to SRS today would mean that my money is locked-in for more than three decades. Since I would gladly exchange the 7% tax savings for 35 years of liquidity, the decision is a no-brainer. I would even argue that this is even worse than CPF liquidity-wise if you consider that funds above half of the Minimum Sum can be withdrawn when we turn 55.
My early semi-retirement goal
The biggest problem is that I have no intention of working full-time till 62 years old and my investments’ returns (especially dividends) are supposed to supplement my income when I semi-retire before 40.
Small benefits due to low personal tax rates for me
Just to clarify, I am not complaining about the low tax rates. It’s just that someone might argue that the SRS isn’t that illiquid and might not be that unsuitable for me even if I want to semi-retire early. After all, the monies in the SRS account are withdrawable anytime, subject to prevailing taxation and a 5% penalty. Since I save 7%, a 5% penalty would still result in a net positive.
At least for me, a 2% return is not appealing enough as compared to the additional hassle and the risk of the monies being taxed at the point of withdrawal. However, I have to admit that the cost-benefit analysis could change drastically if I ever progress to the next tax bracket.
Presence of competitive alternative
There’s little doubt that the main benefit of this SRS is the tax advantages. But if you’re keen on a similar alternative, look no further than CPF. Individuals can also enjoy additional tax relief if they use cash to top up the Minimum Sum for themselves, or their spouse, siblings, parents, parents-in-law, grandparents, grandparents-in-law (up to $14,000). Instead of leaving it in the SRS as cash (low returns) or investing in shares or financial products (higher risk), here is the option of a significant return of 4% with almost zero risk with top-ups to the Special or Retirement Account.
My take is that the SRS is catered to an especially small niche. These are the older folks who already have the full Minimum Sum figure (not eligible for top-ups or noone else to top-up to), pay significant taxes (>$60,000), and have plenty of cash lying around.
I have a strong feeling that my in-laws could be keen on this product since they fulfil the above criteria (after working for >30 years and recently sold off their previous home) so it wouldn’t be fair to say that the SRS is a white elephant even after what I have laid out above!