Financial Planning With SRS

Investment Management & Financial Planning

My objective of creating this blog is to share knowledge on investment management and financial planning. What’s the difference? Investment management covers mainly on investment in shares, bonds, unit trust etc. But financial planning covers even wider areas and longer periods. I think investment management is part of financial planning.

Let’s try this, can you tell me the ultimate objective of buying stocks, bonds or any investment products?

“extra money to spend around….”
“banks give peanuts mah, so no choice invest lor….”
“I need more money for my family…..”

Gentlemen, in my opinion, the above remarks are not “ultimate" enough. The true purpose of investment is to prepare us for a comfortable life after retirement age. Many Singaporeans take this topic lightly. And our Government has been worried about ageing problems (and my first stock analysis will be on Pacific Healthcare, soon).

Among my friends and colleagues, I think about less than 20% are really actively monitor and explore ways to enhance retirement savings. One thing I must really tell my countrymen who are reading my blog - our government has created many avenues to prepare for comfortable retirement life. But many just don’t get it. I am not affiliated to any political organizations directly or indirectly but you think about it, do you find this kind of government everywhere?

Financial planning is a huge topic and is impossible to cover most of the things in one page. Moreover, I am still learning. There are lots of wonderful tips I like to share on financial planning but for a start, I will share on how we can, through tax planning, reduce taxes and create wealth for retirement.

Please read carefully, it’s tax planning, not tax evasion. Do you know what's the two things that nobody on the surface of the earth can escape? Answer - death and tax. In fact, you may still have to pay tax after you die. Anyway, whatever I shared here, it's legitimate and those double-MBA guys sitting in IRAS or CPF are in control. They are the gatekeepers.

Supplementary Retirement Scheme

The Supplementary Retirement Scheme (SRS) was launched in 2001 by the authorities and operated by the big 3 banks. It is quite similar to CPF special account but with different characteristics.

So what is it in short? It is a scheme whereby you transfer your CASH (only) into SRS account with a bank and enjoy tax savings. You can use the savings in the account for investment. The ultimate purpose is for retirement planning, although you can withdraw the money anytime. The benefits of SRS:

- Tax relief. A dollar contributed to SRS will reduce your chargeable income by a dollar.
- Investment returns are accumulated tax-free except for Singapore investment where tax had been deducted from the payer company.
- At retirement, only 50% of withdrawal from SRS is taxable. However, the chargeable income can still be massage by spreading up the withdrawal from SRS account. Most probably, you still won’t be taxed at retirement.

What if you withdraw it before retirement?

- 100% of the sum withdraw will be subject to tax.
- A 5% prematured penalty will be imposed, except in the event of death, TPD or bankruptcy. (So if you die, the amount withdrew is still taxable, see what I mean?).

If you want to read in detail, please check this link. Firstly, let’s get focus, I’m still talking about retirement planning. Opening a SRS account is voluntary but it is a way to force yourself to save more for retirement while enjoying tax savings. Remember the one ultimate objective for investment – comfortable retirement.

So by forecasting your tax payable next year, you can decide how much to put into this account. Perhaps at year end, you happened to dispose a fund and thus with more cash holdings. You wanted to invest it again but there is another better option. Based on your forecast, you are going to pay some money to the IRAS next year. By transferring cash into SRS account, you can reduce your tax payable and continue your investment activities. It may not be significant, but I don’t mind that few hundred bucks of savings from you.

When you reached retirement age, you should withdraw the money over 10 years so that your tax payable is either negligible or none. For this, you need to sit down and work out your needs and how it ties in with your other retirement income. I think such tax planning benefits especially those in middle-income group. Almost all of my friends belong to this income group. Unfortunately, I am still far away from it. Don’t ask me why.

Case Study

I created a spreadsheet to forecast tax payable. Its use is quite limited at this stage but enough for someone with simple tax assessment (Singaporean & tax as residence). Firstly, my spreadsheet has an “idiot-proof” Q&A worksheet. By answering those questions with regards to your income and relief status, the calculation will be done automatically.

So let’s assumed that Mr Anderson’s wife is not working. He has a kid, his mother still kicking but not staying with him and he attended his ICT. Based on the estimates, his tax payable for the basis period should be (around) S$1,367.50. If Mr Anderson transfers S$4,000 into his SRS account before 31 Dec, the tax payable will reduced to S$1,027.50. Tax computation is based on calendar year and so your decision for a transfer can and should be made at the end of the year. Mr Anderson effectively saved S$340 (or 8.5% immediate returns) by transferring cash into SRS account.

Other Options To Reduce Tax Further?

Yes. I had deliberately left “CPF cash top-up” empty in my illustration. Now, we all give monthly allowance to our parents. After all, we are still Asians. Let’s say Mr Anderson’s mum is quite independent with personal savings. Mr Anderson can choose to give his mum a CPF top-up instead of giving her cash to sit in the bank earning pathetic interest. And then, he is entitled a further relief!

Assuming he did a CPF top-up of S$4,000 into his mum’s retirement account, his tax payable will reduce further to S$762.50 (now total savings of S$605). And Mr Anderson’s mum will enjoy 4% returns on her retirement account. So change the way you managed your cash holdings, or give the money to IRAS for being ignorant. You decide.

“Are all these planning stuff legal and welcome by our government?”

Yes of course! By taking care of yourself and your family, they got one less social problem. They should nominate me for NDP award. So deploy our money sensibly till the day we retired. Make sure your money work hard for you. You do it, you will be wealthier compare to another person who do nothing about it, all else remains constant. Remember that our ultimate objective is still retirement planning. The old concept of 养儿防老 (yang er fang lao - invest in children as an annuity) doesn’t work anymore. That doesn’t mean that we leave our parents to rot. But it certainly means that everyone must be FINANCIALLY INDEPENDENT right from the day we stepped into the society.

Lastly, if you like to explore my spreadsheet, give me your email address. Take note that it excludes complex tax issues and only meant for Singaporean taxed as residence. At this stage it’s still F.O.C. because I am still developing it (by adding more complex tax situations). So get yourself “unplugged” like Mr. Anderson.