Grow Your Retirement Fund & Get Tax Relief With SRS [TFC 119 Sponsored By MoneyOwl]

Especially as we chug along on our personal finance journey, we readily move up the tax ladder. As we make more money, we make more income, we have to pay more taxes. As such, a lot of us will start to go down different paths to think about how to reduce our taxes. Of course, legally… and that readily leads us down all sorts of tax incentives thrown out by the government of the day. 

Some of the most popular schemes will definitely be CPF (Central Provident Fund) contributions and SRS: Supplementary Retirement Scheme, which is the focus for today’s podcast. I’m going to share with you the ins and outs of it, how do you play this and some of the major questions that people have when thinking about SRS. Welcome back! 

Today’s podcast is sponsored by MoneyOwl, Singapore’s leading bionic advisor that believes in empowering and fulfilling lives by helping people make wise money decisions, (which is the) same with us. MoneyOwl’s advisors are fully salaried so they believe that by doing so, you get unbiased advice and conflict-free advice. They will not hardsell you and will only recommend you based on your personal needs and goals since they do not earn any commission so that’s pretty cool. 

On top of that, MoneyOwl uses only low-cost instruments like market based, low cost investment funds that they believe to be equally, if not more effective than what’s traditionally recommended out there. Its portfolio consists of fit-for-purpose, low-cost solutions, namely dimensional funds: WiseIncome, WiseSaver with advisory fees that are relatively lower as compared to many other platforms out there today. 

Every dollar you save in the fees is a dollar more for you. I want to thank them for supporting our podcast and I will share with you a little bit more about their recent promotion later in the podcast.

Good morning, everyone! I welcome you to another day with The Financial Coconut. In our podcast, we’ll be debunking financial myths, discovering best financial practices and discussing financial strategies that fits our unique life. You get it, ultimately empowering us to create a life we love while managing our finances well. 

Today we’re going to talk about the SRS game plan. Yeah, not always the sexiest things… taxes, taxes, taxes. But yeah, let’s be real, Singapore’s tax system is already very lean. 

Singapore’s tax system is… I would say very simple already. We do not have complicated tax arrangement which is why you don’t hear a lot of content out there teaching you how to work through the tax systems because there’s nothing much. It’s already so simple, so lean. We only really tax income at this point in time. 

I know in the market out there, in the news, even our Prime Minister is saying, “oh yeah, we’re thinking of taxing wealth”. Whether that happens, that is down the road. As of now, income taxes is the main thing and also consumption tax, which is in the form of GST (Goods and Services Tax). Of course, there are many other smaller taxes like car, property, cigarette tax tariffs… all those things, I cannot complete everything. 

Today, I’m just going to focus on what millennials… many of us listening in, what do we really experience, namely two things: income tax and GST. We are one of those countries that do not tax investment income. We do not have any capital gains tax, meaning if you make money from investments in the capital market: stocks, bonds, derivatives, what have you, you are not taxed. Neither do we tax dividend payouts from any investments. 

In other words, definitely something we should all leverage on which is why you listen to the podcast, I mean… we’ve been talking about it. In Singapore if you invest, you’re not taxed. That is very interesting but it’s a long story and we’ve spent a lot of time talking about it. Even the CEO and CIO of MoneyOwl came on to talk about it. Episode 6, “Chills with TFC”, Chuin Ting, CIO and CEO of MoneyOwl came on to talk a little bit about bonds. 

To her, it’s one of her favourites. Fixed income, how do you do the thing? How do you make money from fixed income and all that? You should check out that podcast to get to know a little bit better, know the person behind the company, especially for our sponsor for today. That is an ongoing discussion, investing and making money and all that. 

But focus on today, SRS: Supplementary Retirement Scheme, which is what a lot of people have been asking. You guys keep asking me. Finally, tax season, someone sponsors so we’re going to talk about it. Before we begin talking about SRS, which is a form of tax incentive, which I will get to that, we must first talk about our income tax system. 

If you’ve just started your career, your starting pay maybe $3.5k, $3.8k… I know, I know everybody has something to say but the median wage in Singapore is $4.4k a month at this point in time. I know not everybody starts at such a pay so just drop by our Telegram group, tag us, DM (Direct Message) us on Instagram to share with us your starting pay. It matters. It helps us get to know you better and we can create content focused on you.

Either way, I’m going to welcome our best friend, Xiao Ming, our Chinese composition best friend, Xiao Ming… or you want Ali also can come in. Either way, I’m just going to use Xiao Ming. Clearly, you can tell which era I come from. So Xiao Ming makes $3.5k a month. That amounts to $42K a year. After compulsory CPF contribution of 20%, assuming Xiao Ming is 55 and younger, his taxable income is $33.6K in a year. 

First gold nugget for all of you listening today, your income tax is based on your residual income after CPF contribution and also, CPF contribution is not subjected to any kind of taxes. When you put money into CPF, they don’t tax you. When you take money out of CPF, they also don’t tax you. We will talk a little bit more about that later. 

Given Xiao Ming’s taxable income of $33.6k a year, he falls into the second income tax bracket, which has an income tax rate of 2% on his first $30,000 income and 3.5% on his remaining $3,600 income. 

The tax system in Singapore is a tiered one so different amounts of your income gets a different tax treatment, aka when you make more, you get taxed more. If you want a clear idea of how much you’re taxed, if it’s not clear enough, you can go to IRAS website, Inland Revenue Authority of Singapore, IRAS website and punch in your numbers to know how much income tax you will need to pay in this fiscal year. 

I will not attempt to throw numbers at you, but what is important is to know that your income tax will get higher and higher as you move up the income bracket because it is a tiered system. As you move up to the next tier, to the next tier, it starts with 2%, 2.5%, it readily goes up to 7% and 11.5%. So yeah, the more you make, the more you’re taxed. 

Assuming your taxable income for the year is $60k, your income tax is $1.9k. If your taxable income for the year is $80K, your income tax is $3.3k. It increases exponentially as you can tell, because it’s a tiered system. If you are in that kind of income bracket and you’re still listening, I’m very happy, very happy… hang around the podcast. Thanks for loving what we do and continuously listening to our podcasts. 

What is important is as you move up, your income bracket, your taxable income moves up and the payable taxes keep moving up… pretty exponential so a lot of us will want to explore ways to “remove those taxes” legally. Which leads us to our focus for today: SRS – Supplementary Retirement Scheme. It is not the only tax relief out there but SRS is very common and it’s our focus for the day. So how does it work and what’s the game plan? I will share more with you and answer a lot of common questions about it.

Quick summary, Supplementary Retirement Scheme is a voluntary scheme to encourage individuals like us to save for retirement over and above our CPF savings. Contribution to SRS are eligible for tax relief, investment returns are tax-free before withdrawal and only 50% of withdrawals from SRS are taxable at retirement. 

Clearly, I took this from (the) government website. But a few parts, okay, so a few parts… Let us break this up, a few parts… Part A is: contribution to SRS are eligible for tax relief. This is part A. Part B: investment returns are tax-free before withdrawal. This is part B and part C is: 50% of withdrawals from SRS are taxable at retirement. We will go through these three main points as we go along on the podcast today. 

Let’s clear the low level stuff first: who can open a SRS account? I would say almost everybody can open an SRS account, whether you’re a Singapore citizen, Singapore PR (permanent resident), or even a foreigner, as long as you make money in Singapore, your income comes from here, you can open a SRS contribution in the current year. On top of that, you must be 18 years old and above, not bankrupt, not suffering from any kind of mental disorder. Essentially, you’re capable of managing yourself and your own affairs. As long as you are making money in Singapore and you have to pay tax, you can essentially open a SRS account. 

How do you go about doing that? It’s very simple, just go to UOB (United Overseas Bank), DBS (Development Bank of Singapore), OCBC (Overseas-Chinese Banking Corp). They never sponsor for today but these are the three banks in Singapore that you can open an SRS account with. Just approach the bank for the process, (it is) very simple, does not require you to invest any SRS money with them. That is the thing that you need to know: you open an account with them, you put your money inside but it does not mean that you definitely have to invest with them. In other words, they are the official channel. In order to open SRS, you have to go through the three of them. Either banks, which one you like, that’s up to you.

How much can you contribute to your SRS yearly? From 2016 onwards, Singaporeans and PRs can contribute up to $15.3k and foreigners working in Singapore can contribute up to $35.7k. This will form the maximum amount of tax relief you can achieve from SRS contribution alone. 

In other words, remember Xiao Ming? Xiao Ming makes $60k in a year. The guy in our podcast, the first guy, his income tax for this year is $1,950. Instead of paying income taxes to IRAS, the whole $1.95k, Xiao Ming, after listening to the podcast, decides that he’s going to put $15k into his SRS account. He’s going to take $15,000 in cash to put into his SRS account and that will bring down his total taxable income from 60K to 45K. That will also mean that his income tax for this year is only 900 so you save about $1,050, can have HaiDiLao (steamboat restaurant chain). 

Of course, there are all sorts of ways as to how we can work these tax relief schemes but I believe it is not about not paying a single ounce of income tax or a single ounce of tax. It is just that as your income move up, you exponentially move up a different tax bracket. From 2% to 3.5% to become 7%, 11.5%… your tax bracket moves up exponentially so some people will explore, like Xiao Ming, to put some money into various tax relief schemes that can bring them down the different tax brackets and essentially, legally, pay less taxes. One of the policies, one of the tax relief schemes is SRS. 

Some people will ask “oh, is it very complicated to do this? I want to explore it but is it a lot of paperwork and all that?” To be honest, IRAS and SRS operators like the big banks, IRAS, Inland Revenue Authority of Singapore, essentially the tax agency and the different SRS operators which is the three big banks have built a direct communication channel. You will not need to submit complicated paperwork but as for the exact process, please clarify with the bank of your choice. In other words, it is just to make it very easy for you so they can start engaging the SRS structure. 

To sum up the first part of the podcast, I think what is important for us to know is that if we have extra cash sitting around and we don’t really need them now and we want to pay a little bit less tax, one of the strategy is SRS and SRS is specifically built to be very simple for a lot of us, so no complicated paperwork. 

That brings us to all the different, interesting questions. I am sure (there are) a lot of interesting questions in your head. A lot of people have different concerns. I read a lot of the blogs and a lot of forums. I’m going to take today to answer three questions that are very common out there specific to SRS.

The first question is: should I top up CPF or should I put SRS contribution? Let’s be honest, if your income is very high, then likely it is not a two-choose-one scenario. If your income is $280,000, $300,000, what have you, you’re at the highest range, then very likely you’ll use both to bring yourself down the income bracket. But for a lot of us, you and I, the common man on the street, we pay about $2k or $1.something in income tax a year, what should we do? Should we top up CPF or should we put into SRS?

 Under such a scenario, the truth is, whether you top up CPF or you put SRS, the total tax relief is pretty much the same. The total amount that you can get tax relief is pretty much the same. What differs are your short-term access to money, options of use and whether your money is still subjected to tax after that. 

Like we’ve said before, anything that goes through the CPF system is not taxable. Money in, cannot tax. Money out, also cannot tax but SRS contribution is potentially subjected to some form of tax when you withdraw.

Why? Because it is seen as a form of income… meaning, if after you pass retirement age, you still have some sort of gig or income, your withdrawal from SRS will be added onto your income to be evaluated for total addressable tax for that year. 

Let’s say when you retire, age 62, not your FIRE (Financial Independence, Retire Early) movement… age 62, you retire but you still have some sort of consultant role in your company. You make about $40k a year. In your younger days, say now, you open your SRS account, you contribute. When you want to take out, whatever you take out every year, let’s say $10k, $20k, will be added onto that $40k which is your whatever income that you have after retirement to… the whole thing will be subjected to tax, you will be evaluated for taxable income every year. That is something that you need to vividly recognize. 

Whereas CPF… under all withdrawal arrangement in CPF, you’re not subjected to any tax. I’m sure we all know that money into CPF cannot just be withdrawn like that, so once you put your money in, it’s a one-way thing. If you’ve tried it before, actually CPF has quite a few pop-ups and push to ask you like “you sure you want to do this? You sure you want to do this?” Once money (goes) in, it cannot come out. 

But for SRS, although it is not like just go to ATM (automated teller machine) and take out money, there is a penalty if you withdraw before your retirement age, you still can do it. There is some sort of access. You can do it. I would say for a lot of us, if we’re still uncertain about our future and we want to have some optionality then SRS will probably be a better option than CPF top-up. 

Personally, I clarify… I do the CPF top-up because it is a commitment to my long-term retirement and I also do the OA (Ordinary Account) to SA (Special Account) transfer, which gives me the 4% yield on my money. I think you should also check out our CPF episodes, Episode 104 and 105… but I will say everybody is different so there’s no one size fit all when it comes to money management or when it comes to investing. Everyone have your own unique circumstance, you have your own decisions, you have your own concerns and you shouldn’t just take what I say for what it is.

I think in point number one, it is just recognizing SRS and CPF, they all give you the kind of tax relief when you contribute to it, but these are the differences and you have to decide which works for you. Of course, if you’re one of those people that use both, then hey, cool stuff… keep listening, thanks for hanging around on the podcast. Which brings me to question number two, very common question out there is: if I have an SRS account, should I invest my SRS money? I have to say the answer is very clear and I will come back to you after a word from our sponsor.

Hey Coconuts! As you know, our sponsor for today is MoneyOwl, Singapore’s leading bionic advisor and they want you to know that rather than let your SRS funds just sit there in the banks and earn a 0.05% interest, you should invest and capture the power of compounding. They believe that where you invest your money, it’s also extremely important and that would depend on your risk appetite, your circumstances, the amount of capital you have and your retirement goals. 

Because MoneyOwl pays their advisors a salary and these advisors do not take a commission on your product, MoneyOwl believes that this is the best way to recommend ideal products that fit your needs. From now to 31st December, you can invest your SRS funds with them and get up to $200 worth of Capitaland voucher, so additional promo(tion) for you. Link is in the description. Go check them out, go shopping.

Coconuts, I will say I agree with our sponsor. I agree with MoneyOwl. If you think about it, if you’re going to put your money in SRS and you’re just going to put it in a bank and hold a 0.05% interest every year, that’s quite… aiyah, not very smart. We should probably execute our money a little bit more. For all of you, just a fun fact: at the end of 2020, the total amount of money that SRS has collected… all the money in the SRS system, there’s still 26% left in cash as of now. I see a lot money in cash, earning 0.05%. Yeah, so very interesting. I would say if you are not one of those that use both SRS and CPF and all sorts of tax reliefs, you should invest your money. 

I know in the CPF investment episode in 105, I did say that I will put a certain amount of money into CPF SA to get a 4% yield before exploring CPF IS: CPF Investment Scheme, making it sound like I don’t want to take any risks for retirement, but let’s be clear. It is a risk-free special account, CPF Special Account risk-free return that I think everyone should capitalize. 

But in SRS, you don’t have that risk-free return. That means if you put your money there, it’s just going to sit there. It’s not going to be doing much. Instead of asking whether you should invest, you should ask what are the options, what is available out there when it comes to the SRS arrangement. 

The good news is, I would say in the SRS ecosystem, almost everything is available. You can invest in stocks listed on the SGX (Singapore Exchange) directly through your broker, you can invest in REITS (Real Estate Investment Trusts), you can invest in ETFs (Exchange Traded Funds) tracking the STI (Straits Times Index), bonds listed on SGX, structured product and even robo-advisors, many of which are there including MoneyOwl and they all have options for SRS investment. 

In a simple way to put it, almost everything in Singapore, you can use SRS. I would think the answer is not if we should invest, but how we should invest and the prevailing investment ideas. All the things that we constantly talk about: diversify, compound for the long-term, low-cost investing… all that exists and essentially in the world of SRS, it’s pretty much the same. You should invest your money and you should explore the different options out there and because MoneyOwl sponsor us, you should talk to them. See if they are a good provider for you. 

Which brings me to question number three and that is how is my SRS money taxed? Like I’ve said in the early part of the podcast, your SRS money is seen as an income whenever it is withdrawn. What happens for most of us after we reached the official retirement age, which is currently 62 and yes, important to note that if you open your SRS account now, subsequent changes in the official retirement age does not affect you. Which means if you open now and somehow, one, two years later, they decide that “oh, we’re going to change to 65″… either way, the new retirement age does not affect you. The day you can start withdrawing is still 62. If you open now, you withdraw (at) 62 or after, depending on what you want. If you choose to withdraw any money before the retirement age of 62, which is the official retirement age at the time you open the account, you are subjected first to a 5% penalty.

Let’s say, you withdraw $50k because you need to tide through some stuff. Your withdrawal from SRS would have a direct penalty of $2,500 and the remaining $50,000 will be deemed as taxable income for that financial year. Assuming you have no other income or tax relief for the year, you have to pay $1,200 in income tax. The idea is to discourage you to withdraw earlier than retirement age but at the same time, still give you the option if you really need it. So the 5%, its like “pinch” you… They don’t want you to just remove it, which is fair because there’s a tax relief and the goal is for retirement. Supplementary Retirement Scheme.

Under the usual case where you withdraw after the official retirement age, you have a 10-year withdrawal window. If you start 65 or 70, or even 80 years old, whichever, whenever you start, you have 10 years. In these 10 years, all the withdrawals, only 50% of it will be subjected to tax. Let’s say you withdraw $50k, only $25k is taxable. The $25k will be added onto the income of that year and the whole income will be subjected to tax. 

What if after 10 years of withdrawal, you still have money left sitting around? I must congratulate you. I think you have put a lot of money in SRS or your SRS investments have performed very, very well. Just for context sake, if after $50k withdrawal every year for 10 years, you still have a $100k left, all that is left will be seen as a lump sum withdrawal on the 11th year and 50% of the whole lump sum will be taxable at once, so $50k in the 11th year. In other words, what I’m trying to say is you need to be strategic not just with your input but also with your output. The withdrawal can get a little bit complicated as the permutation add up so please approach your financial advisor and talk to MoneyOwl to figure out how they can help you with this.

I did a simple modelling. If starting today, you contribute $5k a year into your SRS and make an investment return of 7% a year, after 30 years repeating it, your total port size is about half a million dollars, $505,000 to be exact. Although I made fun of the person that will have $500,000 left in their port in their SRS account, actually it is not that difficult if you really want to do it. So $5K a year, contribute into SRS, 7% every year return… 30 years later, you have half a million dollars.

To be specific, withdrawal is something that you must really look at and think about how you want to do it. If not, you end up paying a lot of taxes, right? If you think about it, you would okay…. Let’s say, you have half a million and within that 10-year withdrawal period, you draw $10k, $20k, $30k, little bit, little bit every year, at the end, you have a lump sum of $300,000 left. The moment you withdraw the $300,000, you’re subjected to the highest tax bracket for the 11th year because you only have a 10 year withdrawal period. At the 11th year, everything comes up as one-time lump sum and that is very, very not tax efficient.

I think for people entertaining SRS, you listen all the way until here, you’re definitely entertaining all these kinds of tax relief schemes. You need to know that SRS’ goal is not tax relief. SRS’s goal is to encourage Singaporeans to voluntarily contribute, to put money for retirement. The tax relief is an incentive to give you, to encourage you to put extra money for your retirement.

With that, of course, there are some more interesting permutation like bankruptcy, critical illness, all those kinds of stuff. You can go and check out the IRAS website. I’m not going to talk about it here today. You can talk to your financial professional or talk to MoneyOwl to see how they can help you and give you more clarity to structure a plan from contribution to investments to withdrawal. Clearly, it can get a bit complicated, but if you listen until here then you’re entertaining SRS, why not think about it? 

I’m going to sum up the three main questions that people ask. Number one is: should I top up CPF or should I put into SRS? I would say CPF money is…. once you go in, you have to wait until you retire to come out so there’s no optionality. You cannot withdraw even though… whatever it is. If you are in the early days of your personal finance and you are considering some sort of optionality, you are still on the fence on “I don’t know how much money I’m going to put for retirement” and what have you, then SRS gives you that optionality on top of the kind of tax relief that it has, which is the same as CPF but you have the option. If you want to take out money, something happens to you, you can do it. 

Point number two is: should I invest my SRS? That is a resounding yes. (You) should not put your money in 0.05% interest in the bank. Whether or not it’s SRS or not SRS, I will say you should invest but the same rules apply. Of course, the SRS optionality is huge. Almost everything you can use SRS. Same rules apply: diversify, low cost, long-term compounding etc.

Which brings me to point number three and that is: how is the withdrawal process? The reality is there’s a 10-year withdrawal period. During this period, you have 50% of all the withdrawal income. If you draw $10k, it’s only $5k added to your taxable income. If you don’t withdraw within this 10 years, all the things that are left, all the hundreds of thousands that is left at the end will be taken as a lump sum withdrawal on the last year or the 11th year. In that sense, you really don’t want that to happen because you don’t want $200,000 – $300,000 all withdrawn at one year and push you up the highest income tax bracket. With that, I hope you learnt something useful today. See ya.

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With that, have a great day ahead. Stay tuned next week and always remember: personal finance can be chill, clear and sustainable for all.

Okay, very long episode today. I tried to squeeze a lot of things into today’s episode, from income tax to SRS comparing some sort of CPF. But that is the discussion out there, right? For a lot of you that are entertaining it, I’m sure you’ve read all the different blogs and different pieces out there.

You listen until here to essentially get my thoughts on this whole thing. Honestly, if you have extra cash and you can entertain this, you are already in quite a good financial situation, I would save. It takes someone to be entertaining SRS and be entertaining tax relief in general. Good news for you. 

So yeah, that’s it for today. It’s coming to the end of the year. Pay your taxes, see what is out there. If you’re exploring SRS, MoneyOwl sponsored us today and they have a $200 voucher, $200 Capitaland voucher. Just nice for your shopping festivity. See if it’s something that you want to explore with them. Go shopping with MoneyOwl and yeah, hopefully they are of service for you. 

Definitely check out the episode that we did with Chuin Ting: Episode 6 of “Chills with TFC” about bonds and fixed income. I had a great time with her and you should totally check out the episode to get her vibes and all that. I hope they are of service for you and I hope you learnt something useful. End of the year… I don’t know what’s tomorrow’s episode or next week’s episode. Meanwhile, take care.