Life Hack #6 – Supplementary Retirement Scheme (SRS)

It’s been a while since I last wrote. Well, let’s just say life took over.

Anyway, by popular demand (to readers who are still following my amateur posts), it seems like SRS is a topic that has gathered quite a few eyeballs. And rightly so – given that it is that time of the season again – Taxes!

Well before I go any further, it is worth calling out at the start that IRAS has enabled an option to allow you to delay your tax payments by 3 months. So if you prefer to have more cashflow in the short term (given all the economic uncertainty surrounding CoVid-19), you can submit your request here.

And in case you are wondering, there are no penalties to this payment arrangement (in regardless of whether you have decided to pay 1-lump sum, or monthly through GIRO). Worth a shout to put CardUp or iPayMy on your radar if you want to convert those payments into miles baby at a decent 1.75% fee, or OCBC Voyage tax payment facility if you prefer to have cash credited directly into your bank account, and sort out separately with IRAS.

Now that we get that out of the way, let’s start by talking about taxes broadly in Singapore, and then dovetail into how Supplementary Retirement Scheme (SRS) can be used for you to reduce taxes.

The mantra about taxes that I live by is “Taxes saved is taxes invested.

And if you think about it, it’s pretty true.

The amount that you saved from paying back to the authorities (well in this case, the government where you are residing in) is actual money where you can deploy elsewhere to grow it (either in savings – though I strongly recommend against it, or better still, investments).

So in many of the cases (which I will show you below), you should spend no more than 10 min to review your tax statement carefully (after logging in to IRAS), and see if there are any exceptions you can file to reduce your taxable income for the previous year (i.e. living with your parents, one/both of your parents are not working and so on).

For simplicity, the way to calculate roughly how much you need to pay your taxes is to use the tax income bracket below –

Tax income bracket stated on IRAS website

So the way this works is – Say you earned $80k in 2019, and after deducting all the tax benefits, your taxable income is $72k. So the math would look like this –

First 20k: $0

Next 10k: 2% of $10k ($200)

Next 10k: 3.5% of $10k ($350)

Next 32k: 7% of $32k ($2240)

So, the taxes you have to pay in 2020 for 2019 income is $2,790.

Now you might be thinking, if I’m earning more, I have to pay more taxes.

Well you are absolutely right.

As the saying goes, there are only 2 things that are certain in life – death and taxes.

Sorry for sounding morbid, I’m actually quite an optimist (but let’s leave that story for another day).

Now depending on which side of the fence you sit on, one could argue “hell yeah, let’s reduce our taxes since we are earning a lot”, or “I don’t earn much to begin with, so I can live with it by doing absolutely nothing.”

Either way, you could make a claim for both, but if you are the latter, I recommend you to bookmark this article and come back when heavy duty (taxes) calls.

But if you are still here, my general rule of thumb is if you earn more than $100,000 a year, there is no reason why you shouldn’t consider other options to reduce your taxes, or at the bare minimum, make your money work harder (drawing reference back to my mantra).

Which leads us to the topic at hand – What exactly is the Supplementary Retirement Scheme (SRS)?

In a nutshell, it is basically a voluntary scheme where the government indirectly encourages you to save up for retirement, and the way they incentivize you is to reduce your taxes by the exact amount that you have decided to set aside in SRS (capped at $15,300 annually).

What a SRS really is – is another bank account that you create with any of the 3 local banks in Singapore that can garner very basic (read: very low) interest.

It is very straight forward to create one and I have copied the link here on how you can create one with OCBC as an example).

Now on the surface it does look all nice and rosy – Save up more, and pay less taxes. But there are of course caveats (cheeky little) to how and when you can withdraw.

For locals, the legal period where you can withdraw your SRS money is when you turn 62 years old, and you have to withdraw all your money within a 10-year period (i.e 62 to 72). Don’t ask me why that is the case because I honestly don’t know, but the magical number you need to familiarize yourself with is $400k.

How this number is derived is taking guidance from how IRAS has set the withdrawal policies – which is half of your yearly withdrawals will be subjected to taxes.

So if you refer back to the tax income bracket that I put up earlier, you might have noticed that people who earns <= $20k do not have to pay a single cent for tax.

If we continue this chain of thought and multiply $20k by 2, we can then say definitively that as long as you withdraw $40k a year, you don’t have to pay any taxes since $40k/2 = $20k (drawing reference to the policy that IRAS has set – which is half of your yearly withdrawals will be subjected to tax).

How smart, to which I say – thank you (but jokes aside, I can only assume that this strategy has been explored by many of the financial geeks out in the market)

In case you are still lost, $40k withdrawn consistently yearly over the span of 10 years nets out to be $400k.

Now if you are still with me, it is still a good idea to park that amount aside for retirement, since it is yours to begin with, and you can take it out when you turn old age. But, I hope you realized that a dollar in 2000 is not the same worth as a dollar in 2020 because that same dollar would have depreciated because of inflation.

Therefore, we still need to make our money work harder even if it is sitting in the SRS bank account. Taking reference from general finance blogs and the 3 banks, it seems like the common interest is 0.05% per annum – and that amounts to nothing really, given that the inflation is expected to grow around 2-3% yearly. If anything, you are getting penalized for saving diligently.

Since this website is all about hacks, there is no question whatsoever that we will be exploring other ways to put that SRS money to work and extract the biggest possible value.

Spoiler Alert – I’m going to save them for subsequent posts but if it teases you to do more research on your own, my choice of weapon is selecting a creditable Robo Advisor, and I have ended up with EndowUs.

As usual, if you find this post helpful in any way, you can support me by opening an Endowus account using my referral link here. Both of us get $20 access fee credit (and you can be sure that I’ll revisit the value props of Robo Advisor on top of the SRS savings)

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