Pros and cons of contributing to your Supplementary Retirement Scheme (SRS)

The Supplementary Retirement Scheme (SRS) is a voluntary scheme offered to CPF members to help them in their retirement planning.

Unlike the conventional Ordinary Account (OA) and Special Account (SA) that would be combined to fund your CPF Life payouts, the SRS account does not have a credible level of return — funds deposited only earn 0.05 per cent per annum interest.

So how can Singaporeans make use of SRS to further their retirement goals in Singapore? And what are the pros and cons?

What is the Supplementary Retirement Scheme (SRS) and how does it work?

The SRS is an additional facility that is provided to all CPF members. Unlike the main CPF scheme, making contributions to SRS is completely voluntary. Members can choose to make contributions at any time (or not at all), and in any amounts they wish.

There are two main benefits offered by the SRS:

1. Lower taxes. SRS contributions are eligible for tax relief, allowing you to pay less taxes. Withdrawals below a certain amount are also tax-free (more on this later).
2. Invest in CPF-approved investments. You can use your SRS funds to invest in the list of investments approved by the CPF Board. This can help you generate more returns to supplement your CPF Life payout or to meet other financial needs.

How much can you contribute to the SRS?

Residency status	Maximum SRS contribution per annum
Singaporeans and PRs	S$15,300
Foreigners	S$35,700

There's a cap on how much you can contribute to your SRS each year, presumably to prevent taxpayers from avoiding their obligations.

As shown in the table above, the SRS contribution cap currently stands at S$15,300 for Singaporeans and Permanent Residents, while foreigners working in Singapore enjoy a higher cap of S$35,700. This is to make up for the fact that foreigners do not enjoy tax relief from CPF contributions in Singapore.

If you're wondering how these figures are calculated, both represent 15 per cent and 35 per cent of an absolute income base, last determined at S$102,000 in 2016. Thus, if the absolute income base is altered in future, the SRS contribution caps will also shift in tandem.

Pros and Cons of Contributing to SRS

Pros	Cons
Tax relief on contributions (subject to overall maximum relief of S$80,000)	Funds must be invested to stay ahead of inflation
Tax-free investment returns	Early withdrawals will be taxed at 100 per cent and incur a 5 per cent penalty
50 per cent tax concession for withdrawals during retirement	Contributions must be made in cash

What are the benefits of contributing to SRS?

Two words: Tax relief.

The main advantage of contributing to your SRS is to lower your tax obligations. The amount contributed will be automatically reported and counted towards your tax relief, reducing your tax bill or maybe even keeping you out of a higher tax bracket. Note that the overall tax relief limit of S$80,000 still stands, though.

Investment gains made through your SRS are also tax-free, in line with the overall policy of not charging tax on capital gains.

Also, when you withdraw your SRS funds after the statutory retirement age (currently 63 years of age) only 50 per cent of the amount withdrawn every year will be taxed. You can also spread your withdrawal over several years to lower your tax charges.

What are the drawbacks of contributing to SRS?

It's important to note that funds in your SRS will only earn 0.05 per cent per annum in interest, which means that your money will be eroded by inflation  over time. For this reason, SRS contributions should be invested to at least keep pace with inflation.

You can choose from any of the CPF Board-approved investments according to your risk profile; the list includes unit trusts, ETFs, blue-chip stocks, endowments and ILPs. You can also invest your SRS in cash-managed accounts offered by robo-advisors.

However, SRS funds cannot be used to invest in real estate, overseas stocks, and commodities. Another drawback to be aware of is that if you make withdrawals from your SRS account before retirement age, your withdrawal will be considered as income for the year, and subject to the prevailing tax rate with no relief. There will also be a five per cent penalty fee, levied separately.

Note that tax on withdrawals and the five per cent penalty may be waived in certain circumstances, see the section on withdrawal rules for more details.

Lastly, SRS contributions must be made in cash only, which may limit your ability to hit the maximum contribution rate.

How much tax can you actually save with SRS contributions?

This will depend on how much your total income is, but in essence, 100 per cent of your contributions will go towards lowering your tax obligations, up to the S$80,000 tax relief cap.

And then, when you make withdrawals during retirement, you can enjoy a 50 per cent tax concession. You can also spread your withdrawals out over 10 years (from the first withdrawal) to lower your tax obligations, which brings up an interesting scenario.

Given that the first S$20,000 in income is not taxed, if you can keep your SRS withdrawal that year under that amount, you won't have to pay any tax at all.

This means that you could potentially enjoy 100 per cent tax savings on your total SRS contributions.

What are the withdrawal rules surrounding SRS?

It’s worth taking note of the withdrawal rules regarding SRS, so as to benefit from the scheme as fully as possible.

See the table below for a summary:

WIthdrawal condition	Tax and penalty fee
Withdrawal on or after prescribed retirement age (withdrawal can be spread over 10 years from the date of first penalty-free withdrawal)	Tax: 50per cent of amount withdrawn Penalty: nil
Withdrawal on medical ground (physical or mental incapacity; partial withdrawal on grounds of terminal illness)	Tax: 50per cent of amount withdrawn Penalty: nil
Withdrawal in full due to terminal illness	Tax: First S$400,000 exempt, 50per cent of withdrawal sum thereafter Penalty: nil
In the event of bankruptcy	Tax: 100per cent of amount withdrawn Penalty: nil
Withdrawal in one lump sum by a foreigner (with at least 10 years holding period)	Tax: 50per cent of amount withdrawn Penalty: nil
Early withdrawals before prescribed retirement age	Tax: 100per cent of amount withdrawn Penalty: 5per cent
Source: IRAS

Conclusion: SRS, a credible option for the tax-conscious

Ultimately, the SRS is best used as a tool to (legally) lower your tax obligations. By reducing your assessable income by over S$15,000 every year, you could realise a good amount of tax savings over the long run.

However, you will need to be prepared to take on investment risks, as you will have to invest your funds so as to hedge against the negative impact of inflation. Whatever you do, do not simply make a contribution and leave your funds idle.

SRS contributions cannot be reversed, and as stated above, withdrawals before retirement age will incur tax obligations and also a separate five per cent penalty, where applicable.

You should only contribute funds that you do not foresee yourself needing until retirement — in fact, it's best to treat SRS contributions as part of your long-term retirement planning.

ALSO READ: Best savings accounts in Singapore with highest interest rates (December 2023)

This article was first published in ValueChampion.