“Top up $1 to your Supplementary Retirement Scheme (SRS) account to lock-in your retirement age!”
Some of you may have heard about this hack from your savvy friends. This article is a complete guide on what the SRS is and why everyone should make use of this $1 SRS hack.
What is the Supplementary Retirement Scheme (SRS)?
The SRS was started in 2001 and is part of the Singapore government’s multi-pronged strategy to address the financial needs of an ageing population. Similar to the Central Provident Fund (CPF), the SRS was conceived to encourage Singaporeans to save more for their retirement.
This begs the question, “If they both serve a similar purpose, what’s the point of having another scheme?” Before I answer that question, here are a few important things you need to know about the SRS.
Unlike the CPF, which is an involuntary savings scheme that aims to provide Singaporeans with a very basic retirement, the SRS is completely voluntary. Thus, the SRS can be seen as an additional retirement savings scheme for those who wish to set aside more money for their golden years.
Since the SRS is for your retirement, you are only able to make a withdrawal without facing penalties after the statutory retirement age. Upon reaching the retirement age, you can withdraw up to $40,000 per year from your SRS account tax-free (read below to find out how the statutory retirement age is determined.
However this is where the SRS differs from the CPF. With the SRS, there is greater flexibility if you wish to take the money out before your retirement age. However, much like a typical fixed deposit with the bank, doing so will subject you to a penalty. If you perform an early withdrawal before the stipulated retirement age, there will be a 5% penalty and the amount withdrawn will be taxed. These penalties are implemented to ensure that Singaporeans actually put money in for their retirement.
Of course, there are incentives to use the SRS. Similar to the CPF, making contributions to your SRS account by 31 Dec of every year will qualify your for tax relief. As with the CPF, there is a contribution cap as well. For Singaporeans and PRs, the cap is $15,300. For foreigners, it is $35,700.
Why set up an SRS account on top of the CPF account?
Now that we have laid out the basics of the SRS, here are some benefits of setting up an SRS account on top of CPF.
1. Money in SRS can be invested more flexibly
While CPF money in your CPF can be invested as well, there are certain limitations that make it very restrictive. First, your ordinary account (OA) savings can only be invested after setting side $20,000 in your (OA) while your special account (SA) can only be investing after setting aside $40,000 in your SA. Furthermore, you can only invest up to 35% of your investible savings in stocks.
Don’t understand what I just said? Not to worry, you are not alone.
These rules make it troublesome to invest using CPF monies. SRS, on the other hand, is much more flexible in terms of investing and there is a much wider range investment options available.
Here are some examples of government-approved SRS investment options:
- Fixed deposits
- Life cover
- Real Estate Investment Trusts (REITs)
- Singapore Savings Bonds
- Single-Premium insurance products (both annuity and non-annuity plans)
- Unit trusts of Mutual funds
2. SRS is more flexible than CPF in terms of withdrawal
Unlike the CPF, money in your SRS account can be withdrawn at any time albeit with some penalties. However, this can serve as a last resort in the event that you require a large sum of money for an emergency and do not have sufficient cash set aside. That being said, it’s still better to have an emergency fund and avoid having to drawdown your SRS savings.
3. Greater tax breaks
Currently, the maximum CPF cash Top-up Relief per year is $14,000. This is broken down into a maximum of $7,000 if you top up for your own CPF account and a maximum of $7,000 if you top up your family members’ accounts. If you max out the CPF tax relief, any additional amount you contribute to your CPF accounts will not provide you with additional tax benefits. If you wish to set aside even more money for retirement, a SRS account will allow you to do so while enjoying even more tax reliefs at the same time (up to $15,300).
Of course, there are trade-offs between choosing to top up your CPF or SRS account. While SRS has greater flexibility than CPF in terms of withdrawal and investments, CPF provides 2.5-5% interest guaranteed by the Singapore government. On the other hand, cash left in the SRS will earn a measly 0.05% interest. This means you have to invest in assets (equities and/or bonds) to earn a fair rate of return. This would also mean that you will be taking on greater risk than if you topped up your CPF account. However, I do think that an SRS account on top of a CPF account do provide many benefits.
How is the stipulated retirement age determined?
The stipulated retirement age at which you can withdraw money from your SRS account without incurring penalties is the prevailing retirement age (set by the government) when you open the account. This retirement age is “locked in” when you open your SRS account and make your first contribution.
This means that if you open an account this year, the “locked in” retirement age on your account will be 62 years old, no matter what your age is today. However, starting from 1 January 2022, the prevailing retirement age will be raised to 63 and this will be the retirement age at which you can withdraw your money if you set up your SRS account next year. While one year may not make a huge difference, it is worth noting that the government has plans to raise the statutory age of retirement to 65 years old by 2030!
The $1 SRS hack
If you are still on the fence about the SRS but you are worried that the government will keep raising the retirement age in the future, this $1 SRS hack is for you!
Simply create your SRS account and top up $1 into your SRS account before 2022 (just a heads up, at the time of writing, there’s only 21 days left!). This “locks in” your retirement age at 62 years old, regardless of whether you make contributions to your SRS account in time to come.
You can choose to open your SRS account with any of the following banks in the private sector: DBS, OCBC, or UOB. The good news is, you can set up the SRS account online in under a minute!
I personally used DBS as that is my savings account but I do not think that the choice of bank really matters. Here’s how to create your SRS account for DBS users:
- Open the digibank app
- at the bottom panel, select “more”
- Under the “apply” section, find “SRS Account”
- Create an account and contribute $1!
Additionally, here are more information about creating your SRS accounts with the respective banks.
Personally, I find the SRS a complement to the CPF. On top of setting aside more money for retirement, the SRS will allow us to enjoy greater tax reliefs and tax-free returns. Even if you are not sure whether you will make use of the SRS, I think everyone who is eligible should create an SRS account before 2022 to lock in their retirement age. There is no costs involved and you only stand to gain from locking in the retirement age earlier.
Okay fine, I lied. The cost is $1 and a minute of your time.