Before getting into details about the SRS account it is important to understand what this is and how this works. This SRS Scheme is voluntary and is one type of encouragement, helping you to save for the retirement period. Choosing to contribute to this SRS Scheme you can also avail of the tax benefits. The contribution made to the SRS account is totally tax-deductible. Presently, the amount which can be contributed to the SRS account every year works out to $15,300 to the maximum for Permanent residents (PR) and Singaporeans and $35,700 for the foreign nationals.
Maximum Benefits from the SRS Account:
Maximizing long-term benefits from the SRS account is easy if you follow the strategies listed below.
You need to be aware that once you have made your contributions to the SRS Account you cannot withdraw before the age of 62 years, which is the statutory age of retirement. In case you require funds urgently you will be paying a penalty of almost 5% besides the applicable taxes on your withdrawals. This account can be termed as ‘locked up’ till the age of 62 years. You need to choose this SRS Account only if you have enough of liquidity, which is, having around 12 months of the living expenses either in investments which are of low risk or in the savings account.
Maximum Amount Contribution:
In the case of you having enough of savings it is important to ensure that the contributions made to the SRS account are up to the maximum. This ensures a balance between tax reliefs and liquidity. Permanent residents (PR) and Singaporeans can contribute $15,300 every year and Foreign Nationals can contribute $35,700 every year to the SRS Account.
The contributions made to the SRS account can earn a meager 0.05% interest if left in the SRS account. This amount tends to lose value over a period of time due to the inflation, which is almost 2%. You need to plan on the right investments of these funds in the SRS account to ensure maximum benefits. The money which is earned with the investments is put back into the SRS account before any liquidation. Before deciding on any specific investment, it is important to consider the pricing structure and the fees.
The appropriate timing of the withdrawals of the SRS account can help you maximize on the tax benefits. You need to be aware that the funds in the SRS account cannot be used for medical purposes or for investment in property. It is important that you meet the conditions of early withdrawal as otherwise you are faced with a 5% penalty and tax is levied on the total amount withdrawn.
Once you are of 62 years you can plan the withdrawals over a period of 10 years. At this time, the amount which is taxable is 50%. The best way to go about this is to minimize income tax during these 10 years by opting for withdrawals over a period of 10 years. More of the funds can be withdrawn when you do not have any streams of income.
Investing with SRS Account:
Before investing on any specific investment product you need to make sure you have total information and knowledge on this. You also need to find out whether the specific investment product is permitted by the SRS. Knowing the many advantages along with the disadvantages ensures you do not lose out with the investment.
Get familiar with the different concepts of investments, like the returns and the risks, active and passive investing, financial ratios and also diversification. It is definitely advisable to seek the help of a qualified and well experienced financial advisor.
Ensure you include considering the different fees which are applicable for the specific investment from the investment firms or the banks. You can plan on investing on stocks via the DBS Vickers account. Ensure you have a clear picture of the profits made of these investments which will be back in the SRS account.
It is easy to invest in securities which are SGX listed like STI ETF, REIT and shares. Once you have created the SRS account, you need to approach a specific brokerage for stocks for the required linkage. The selling and buying of stocks is the normal procedure except that you will have to tick mark the SRS box to show your interest.
You can also invest in a number of assets like the UOB Bonds. You can also invest in fixed deposits, insurance, and Unit Trusts.
Investing in Insurance:
There are specific restrictions when you invest in insurance from the SRS contributions. You can invest only in products of single premium, which also includes products of recurring single premiums. The life cover is capped at almost 3 times of the premium and includes benefits of permanent and total disability. The plans chosen can let the continuation of the contribution benefit or feature upon the disability.
Consideration for SRS Account Contributions:
As mentioned, it is important to consider specific factors before you plan on making contributions to the SRS Account. The penalty and tax levied on early withdrawals can work out to be a negative with this SRS account. It is thus important to ensure you have planned in accordance to the different possible requirements.
You also need to be aware that investments for property are not allowed with these SRS account contributions made. In case you intend investing in a properly in the near future it is advisable not to opt for the SRS contributions.
Contributing to the SRS account at an appropriate age can work beneficial. This is around 40 to 45 years. Before you plan on this contribution you need to consider not only your age but also the income tax bracket, estimated growth rate of your income, estimated returns on the investment and estimated rate of inflation.
Seeking help from a qualified and experienced professional can help you with all the confusion you might face when deciding on the SRS account contributions.