There’s been a lot of interest lately in investing through Singapore’s SRS, or Supplementary Retirement Scheme. This voluntary scheme encourages individuals to save for retirement, over and above their CPF savings. While there are a host of great articles that review the technical aspects of having an SRS account, two main questions continue to be frequently asked around financial planning:
- As an expat, what should I understand about investing in SRS, aside from its use for Singapore income tax reduction?
- Should I pay less tax now and commit to long-term goals with a SRS account? Or should I pay tax and have cash available for goals now?
Michael Borchert from Avrio Wealth addresses these questions, below.
#1 Tax Reduction
Contributions to an SRS account are eligible for tax relief up to an annual cap of S$15,300 for Singaporeans and Permanent Residents, and S$35,700 for Foreigners. If you’re making enough income to be in an upper tax bracket, this relief can lower your tax considerably. A Singapore client could save upwards of S$3,366 on taxes a year, for example.
The important consideration is that SRS saves income tax only. Investments in Singapore are currently not taxed on capital gains; so investing with an SRS account or investing with a normal brokerage account makes no difference on long-term gains.
Expats looking at financial planning will want to consider what happens if they relocate. If you return home with the SRS account, you may have home country tax to pay on gains in the account after your relocation. Under what’s known as the “10-year parking period”, you can close the SRS account 10 years after opening it and not pay the withdrawal fee. Remember: 50% of the withdrawal will still be subject to Singapore tax; and you may also have tax in your home country to review.
Americans who are considering their financial planning should know that SRS adds a great deal of complexity around taxes, investment choices and limitations. SRS investment options are limited by regulation, and most providers will not accept US clients on their platforms. If you do invest, this forces foreign tax reporting, higher tax on gains, and limited write-offs on losses. In many cases, the tax deduction from SRS may actually cost you more US tax, depending on your tax credit level.
#2 Goals and Cash
While it can reduce your income tax liability, once you invest in an SRS account there are some minimum requirements for leaving your money. If you withdraw early, for instance, you pay the tax that was relieved, plus an additional 5%. As this combined amount can be upwards of 27% in penalty, it’s a costly consideration.
So, what to do about the short term? From a financial planning view, it’s important to understand your cash needs on an annual basis. If you have restrictions on your budget, a need for cash in the next few years for specific goals like property, or your savings capability is limited, it may be best not to invest in SRS.
When thinking about these short-term considerations, it’s best to check how much you tax you will save. Saving on income tax is an advantage, but in certain instances it may be better to pay tax now and have cash that is flexible and available for your financial planning goals.
Conclusions on SRS
SRS may have distinct tax advantages depending on your nationality and how it fits your financial plan. Many have benefited through the scheme by saving on tax and from having an increased focus on retirement savings. Depending on your needs, though, you may want to review contributions on an annual basis. Contact your financial advisor if you have further questions regarding the scheme and how it can help you.
For information on how to optimise your retirement income contact Avrio Wealth,
For advice on savings, investments and other financial matters, with Michael call him on 91293030 or email mborchert@avriowealth.com
