Pay attention to withdrawal timing from Supplementary Retirement Scheme
https://www.straitstimes.com/business/invest/pay-attention-to-withdrawal-timing-from-supplementary-retirement-scheme
2023-12-24
The Supplementary Retirement Scheme (SRS) encourages individuals to save for retirement, over and above their CPF savings.
Contributions are eligible for tax relief. The maximum contribution by Singapore citizens and permanent residents is $15,300 a year, while foreigners can put in $35,700.
You can withdraw your SRS savings at any time. But if you do so before your prescribed retirement age, all the withdrawn sum will be fully taxed and attract a 5 per cent penalty, based on the withdrawn amount.
The prescribed retirement age is the statutory one prevailing when you made your first SRS contribution. This is now either 62 or 63.
Penalty-free withdrawals can commence at or after the prescribed retirement age. You can make penalty-free withdrawals from your SRS account over 10 years, starting from the date of your first penalty-free withdrawal. During this period, only half of your SRS withdrawals will be subject to tax.
Mr Elijah Lee, senior financial services manager at PhillipCapital, has outlined five tips to help Sunday Times readers get the most out of their SRS accounts.
1. Aim to align the payout period of your policies with the penalty-free, 10-year withdrawal period
Buying an annuity or endowment with SRS funds is not uncommon. When it comes to such term annuities or endowments, the taxman assumes the term annuity is liquidated at the end of the 10-year penalty-free withdrawal period.
The surrender value of the policy at the end of the 10th year of SRS withdrawal will be deemed to be withdrawn and 50 per cent will be subject to tax.
There will be no further tax after the end of the 10-year withdrawal period even if you continue to receive payments from a term annuity.
If you need funds after the 10 years and want to surrender the term annuity, you may approach the product provider.
For life annuities, payouts will continue to be made until the product owner dies.
If the payouts started before or during the 10-year withdrawal period, they are paid into the SRS account. Only half of the SRS withdrawals made during this period will be subject to tax.
Once the 10-year withdrawal period ends, the life annuity payout will be paid directly to the SRS member and 50 per cent of the life annuity payout will continue to be taxed.
Mr Lee says: “Ideally, time the withdrawals of your term annuity or endowment to start during the 10-year withdrawal period to minimise the tax. Even if the payouts continue after the 10-year period, your taxable income should be lower by then and attract less tax.”
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2. Time your withdrawal period to coincide with the start of retirement
If you have already opened an SRS account and made your first contribution, any subsequent change in the statutory retirement age will not affect you.
There is no specific period on when the penalty-free withdrawal must commence for withdrawals on or after the prescribed retirement age.
However, the 10th year will be counted from the date of the first penalty-free withdrawal. For example, if you start withdrawing when you are 72, the 10-year period will be from 72 to 81 years old.
People who work for longer can save tax if they begin their 10-year withdrawal period at a later age when they have fully retired and are no longer earning.
Mr Lee notes: “As some people may be working longer past their prescribed retirement age, they can consider commencing their withdrawal period later.”
3. Withdraw investments during market lows
If you have investments, including stocks, in your SRS account, the same practice applies – only half the value of the withdrawals will be taxed during the 10-year period.
Previously, investments had to be sold and the funds transferred out as cash. But since 2015, SRS members can apply to have the investments withdrawn and transferred out of the account, without having to liquidate them.
The valuation is based on when the withdrawal is made.
If the intent is to hold on to these investments for the long term, one way of optimising withdrawals is to time them during market lows as their relatively lower valuation will attract less tax, advises Mr Lee.
4. Remember your other sources of taxable income such as rental income
Mr Lee notes that there may be other sources of taxable income, such as investment properties generating rental income. These should be taken into consideration when planning for withdrawals.
Take for example a 65-year-old retiree who has decided to start his 10-year withdrawal period. At the same time, he is receiving annual rental income of $60,000 from an investment property. This income is subject to income tax.
Although only 50 per cent of the SRS withdrawal sum is subject to tax, this will increase his tax bill as he already has to account for the rental income.
Mr Lee says SRS members will have to take such sources of income into consideration when planning how best to manage their investment portfolio during retirement. They should consider how long they want to keep the investment property or if they want to defer the withdrawal period to when they no longer have such taxable income.
5. Deploy your SRS funds
Many people leave their funds in their SRS account, where they only earn 0.05 per cent interest.
Mr Lee encourages deploying these funds elsewhere to boost your returns. Even if you are risk-averse, there are safer options such as annuities and endowments that offer reasonable returns.
Investors with a higher risk appetite could consider unit trusts, equities and exchange-traded funds among other options.
Mr Lee notes: “Even if you think the current market does not offer an attractive entry point, do consider making a plan of action for your funds.
“For risk-averse SRS members, putting some funds into an endowment or annuity will still offer better returns than leaving the money idle.”
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