Supplementary Retirement Scheme (SRS): A Money Crunching Guide Part II
Do you think paying $850 more in income tax each year is nothing much? Wait till you see how much you are losing at the end of 30 years (it’s a mind-boggling six-digit sum!) Make use of Supplementary Retirement Scheme (SRS) by introduced by our government. I’ve talked about how SRS worked in my previous post. Let’s see the real numbers now.
Let’s take a look at how income tax is calculated. For example, your chargeable income is $50000. It used to be $40000 the previous year. Tax on the first $40000 is $900. The additional $10000 is $850. Total income tax will be $1750. By earning $10000 more, you have to pay double the income tax of previous year.
|
Chargeable Income |
First $40000 | Next $40000
8.5% |
Next $80000
14% |
Total Tax |
| $50000 | $900 | $850 | - | $1750 |
| $90000 | $900 | $3400 | $1400 | $5750 |
If you put $10000 into the SRS, you could save $850 if your chargeable income is ($50000-$10000=$40000) or $1400 ($90000-$10000=$8000).
For those in a lower income tax group, $10000 may seem like a big sum. There is a lot we can do with $10000. To take this amount out, it can be rather tough for some of us. Besides, one of the disadvantages of SRS is we will not be able to touch the money until retirement. With a lower income, $10000 is a lot to fork out a year.
The good thing about SRS is we can use the money in SRS to invest. If you are currently buying unit trusts and stocks, the money in SRS can be used to invest. Your proceeds will go into SRS. This will certainly overcome the paltry returns on interest rates provided by SRS banks.
In my original computation of investing $11,475 a year (the maximum amount we can contribute to SRS), by investing SRS in an index fund which could give returns of 12% a year, the sum becomes a mind boggling $3.45 million. (3,445,397.77). Even if you have to pay income tax on $344000 a year (the money has to be withdrawn in 10 years), you will probably pay about $45000 in taxes and still have lots more left.
Now, what if you had just willingly paid the extra money in income tax?
Let’s assume you never had a pay rise, so you have chargeable income of $50000 every year. The additional $850, if invested in an ETF that returns 12% a year, will become $255,214.65. This means, you can potentially lose $255k if you don’t reduce your tax. And since most of us have the potential to earn more each year, there is a greater potential loss!
Gosh! I’m going to open a SRS account next week. There are three banks where we can open an SRS account with – DBS, UOB and OCBC.
Sarah Tan – SingaporeProfit.com
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Hi Sarah, this post of yours makes me want to invest money in SRS too :Þ . But since it is a monday morning, with all the facts and figures you have provided, I think I will need to read your post a few times to fully grasp SRS. Very informative blog you have.
Hi Andrew
I think if you are planning to do some investments, and have spare cash, you can consider SRS. This money cannot be taken out until you are 62 years old, or later, depending on the government. If you wish to take out, there will be some penalty. I’ll write more when I gather more information.
Hi Sarah, in view of the recent PM’s national day rally speech, any idea if the SRS withdrawal age (i.e. 62yo) will be similarly postponed like the CPF withdrawal ??
[...] my previous article on Supplementary Retirement Scheme (SRS): A Money Crunching Guide Part II, Jeff asks: Hi Sarah, in view of the recent PM’s national day rally speech, any idea if the SRS [...]
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