Dodge income tax (legally) on your path to FIRE in Singapore – Making use of the Supplementary Retirement Scheme (SRS)

“… but in this world nothing can be said to be certain, except death and taxes”

Benjamin Franklin

Ah… it’s that time of year again. After everybody gets their bonuses, comes tax season – when we do our part to help build a better Singapore.

Although everybody above a certain income level must pay taxes to help build Singapore, there’s also no sense in paying more than we should, especially when the Singapore government provides legitimate ways to avoid it.

Important: I do not condone or recommend tax evasion, which is a crime. This post is about tax reduction through government sanctioned means. So here we go!

As people on the path to FIRE we are also trying to save as much as possible, so if there’s opportunities to save on taxes and increase our investable funds, we should grab it with both hands.

With that being said, there are several ways that the Singapore government provides for citizens and residents to reduce their income tax obligations, one of which is the Supplementary Retirement Scheme (SRS.)

As this post goes into quite a bit of detail so you may wish to skip to the parts that interest you. Here is are the main sections of this post:

1. What is the Supplementary Retirement Scheme?
2. What are the benefits of the SRS?
3. What can we use our SRS funds to invest in?
4. How do we withdraw funds?
5. How do we optimise our SRS funds? My example.
6. How do we start contributing and investing with our SRS funds?

Disclaimer: But before that, of course, a little disclaimer. I’m not a certified professional accountant or tax advisor – just a guy trying to share what I’ve learned on my own – so please do not take this as tax or financial advice.

What is the Supplementary Retirement Scheme (SRS)?

The SRS is a Singapore government tax deferment program setup to incentivise its citizens, residents and even foreigners to save for retirement. It is meant to complement the CPF and help increase retirement savings. However, unlike the CPF, participating in the SRS is completely voluntary.

As long as we are at least 18 years old, not mentally disabled and not bankrupt, we are able to contribute to the SRS.

All contributions made to the SRS – within the annual SRS cap – are completely exempted from income tax and thus reduces our total taxable income for the year. Therefore the more we earn – the higher the tax bracket we belong to – the more beneficial the SRS becomes.

In order to fully understand the benefits, let’s first take a quick look at how Singapore’s income tax system works. If you already understand this, you can skip the next section.

How does Singapore’s income tax system work?

Singapore’s income tax system, like many developed country’s taxation system, works on a tiered structure. Our income is split into different bands (called tax “brackets”) from lowest to highest and each portion is subjected to different tax rate based on this table (Source: IRAS website):

As you can see, the tax rate starts out quite low. In fact, if you make S$20,000 or less each year, you don’t pay any tax at all.

Once you start making between S$20,000 and S$30,000, the portion that is above S$20,000 is taxed at 2%. The tax at each income band is called the marginal tax rate. If you make between S$30,000 and S$40,000 the portion that is above S$30,000 has a marginal tax rate of 3.5% and so on.

This way if you are a lower income earner, you barely pay any tax at all, but as you make more the additional portions of your income gets taxed at a higher rate. This allows the government to tax higher income earners more while still providing an incentive for workers to earn more income.

If the rate is flat and applies to the entire income, a person earning S$20,000 (0% tax, S$0) would not want to increase their income to S$20,100 because their tax would increase to 2%, which is S$402, a net loss of S$302. In the current tiered structure, only the S$100 increment will get taxed at 2%, which is only S$2 in taxes, a net gain of S$98 over all.

What are the benefits of the SRS?

So now that we’re all up to speed on how Singapore’s income tax system works, we can start to dissect the benefits of the SRS.

As mentioned at the top of the article, all contributions – up to the annual SRS cap – is completely exempted from tax. So what does this mean? Well let’s take a look.

As of 2019, the annual SRS cap is S$15,300 per person per year (for Singaporeans and SPRs). For foreigners it’s a bit different as they don’t get the tax benefits of CPF; their cap is S$35,700 per person per year.

So assuming that we are Singaporean or SPR, if we contribute that amount to our SRS, we will effectively reduce our taxable income by S$15,300.

As an example, if we are earning S$100,000 in taxable income per year. Here’s the tax calculations without the SRS contribution:

If we did not contribute any money to the SRS account, our tax payment would be S$5,650 at the effective tax rate of 5.65%.

However, if we decided to contribute the maximum amount of S$15,300 to the SRS, our taxable income is reduced by the same amount and thus we are actually left with just S$84,700 (S$100,000 – S$15,300). Let’s look at how the tax calculation looks like now:

Due to a reduction of our taxable income, which comes off the top at the 11.5% tax band, our tax payable is reduced by S$1,759.50!

Now let’s take a look at another example, let’s say we’ve doubled our income and now we earn a taxable income of S$200,000 per year. According to the above tax table, we’ll have a tax payable of a whopping S$21,150!

Now, if we contributed S$15,300 to the SRS. Our taxable income drops to S$184,700. This will bring down our tax payable to S$18,396, a tax saving of S$2,754!

As you can see, the more we make, the more we save in taxes by contributing to the SRS, so I made this handy table to show the tax savings we will get based on our highest tax band with the maximum SRS contribution of S$15,300:

As you can see, even though we’ll save tax money by contributing to the SRS, it won’t make sense for everybody.

Personally I believe that it will only start making sense when you make enough to hit the 7% marginal tax rate and above. Any lower than that, your tax savings is not worth locking up a substantial part of your liquid income for a relatively low tax savings.

OK, great, so we save on the income tax up front when we contribute to the SRS, but it won’t do us any good if the money just sits there and drops in value due to inflation right?

Well, the Singapore government isn’t stupid and they agree, that’s why they’ve allowed us to invest this money with very few restrictions. Let’s see what we can do.

What can we invest our SRS funds into?

Unlike investing with your CPF OA or CPF SA monies, there is a lot less restrictions on what kinds of investments we can invest in with the SRS funds. For a comprehensive list of investment vehicles we can choose to invest in, you can refer to these below articles that provide a good overview:

• 10 Investments You Can Make With Your Supplementary Retirement Scheme Account – Dollars & Sense
• How to Invest Your SRS Account: The Complete Guide – SG Money Matters

Any funds we invest using our SRS account will grow in the account tax-free until they are withdrawn.

Although the investment vehicles are not restricted, unfortunately we are still restricted to investment vehicles that are listed through the Singapore Stock Exchange.

That shouldn’t be a problem though, in my case – as detailed in my Bogleheads 3-Funds Portfolio post – I need to invest some funds locally to form the local funds portion of my portfolio anyway.

So for me the decision is quite simple. I will be using my SRS funds to invest in the STI ETF to form the local funds portion of my portfolio.

If you’d like to have a better understanding of the merits of the STI ETF, I’d suggest you check out my comprehensive analysis on the past returns of the STI ETF.

Well, now that we know that we can save on up-front cost from income tax and grow the funds over time by investing it. However, since all investment proceeds gets returned to the SRS account when you sell them, how do with withdraw the funds?

All of the tax savings look great so far but it seems too good to be true. What’s the catch? How do we withdraw the funds to buy our yacht later?

How do we withdraw funds from the SRS?

We’re asking all the right questions, there’s no free lunch – but it gets pretty close. So here’s the catch.

There are 2 main categories of withdrawals which I’ve illustrated below:

The “Retirement Age” is dependent on the prevailing statutory retirement age at the time of your first SRS contribution. So since my first SRS contribution will be this year (2019) my effective retirement age will be set at 62.

Note: There are other special cases for withdrawals which I have not gone into here (i.e. medical reasons or you’re a foreigner who is no longer living in Singapore, etc.) If you wish to read up on these special cases in more details, you can refer to MOF SRS Website.

As you can see, we have quite a lot of freedom when it comes to withdrawals. Our money isn’t necessarily locked up in the SRS like it normally is with CPF, which we cannot withdraw in cash until age 55 (and even then, we can’t take out everything.)

There’s quite a bit of things to highlight in each of the withdrawal categories, so let’s take them one by one.

First, if we’re looking at early retirement, we might want to withdraw the funds much earlier than the statutory retirement age, so how does that work?

Withdrawal Before Statutory Retirement Age

As people aiming to achieve FIRE, our target retirement age will be much lower than most others and will certainly be lower than any prevailing statutory retirement age. In my case, my target is a nice round number of 40 years old with the statutory retirement age of 62 years old.

So what happens if I have funds within SRS that I wish to withdraw to cover my living expenses?

First, I am able to make withdrawals as many times as I’d like, no problems here.

Second, there’s a 5% early withdrawal fee based on the amount that I’m withdrawing, bummer.

Third, 100% of any funds that I withdraw taxable, calculated as part of that year’s income.

Here’s the cool part though, if I stopped working at 40, I would have no income… zero. So I can actually withdraw up to S$20,000 (based on the income tax table) and be liable for 0% tax. Nice!

So if my marginal tax rate was 7% at age 39 and I contributed S$15,300 to SRS I would have saved S$1,071 in income tax. Now when I’m 40 with no income, I can withdraw the same S$15,300 back out at 0% tax and just 5% early withdrawal fee:

• Income Tax Payable: S$0
• Early Withdrawal Fee Payable: S$765

This results in a saving of S$306.

If I had a 19% marginal tax rate, I would be saving S$2,142 even after the 5% early withdrawal fee.

The higher your marginal tax rate at the time of contribution, the bigger your margin for early withdrawal.

However, you should only do this if you really need the money within your SRS as you’re unnecessarily paying withdrawal fees and reducing the amount of tax-free money that you’re growing in your SRS account.

If you can wait until you have passed your statutory retirement age, the benefits become even more pronounced. Let’s take a look.

Withdrawal After the Statutory Retirement Age

Now we’re getting to the good part. Once we reach our statutory retirement age, we gain access to our retirement superpower with regards to the SRS funds.

Once here, we are able to:

1. Withdraw funds without paying any fees.
2. Only 50% of the funds withdrawn are subjected to income tax.

Point number 2 is the core benefit here. Given that our income is not taxed if they are at S$20,000 or below, we are able to withdraw up to S$40,000 per year completely tax free!

The only catch at this stage is that we only have a total of 10 years to withdraw everything from the SRS account. The 10-year clock will start counting down when we make our first withdrawal.

If we do not withdraw all funds within 10 years, 50% of the remaining amount will be subjected to income tax.

The best approach for withdrawing after the statutory retirement age

Due to the nature of the tiered structure of Singapore’s income tax – higher marginal tax rate at higher tax brackets – it is better for us to divide the withdrawal amounts we have in our account as evenly as possible across the 10 years and leaving a similar amount in the SRS account.

This will evenly split into 11 equal amounts, all subjected to 50% tax at the lowest possible tax bracket.

Let me illustrate. Let’s assume that we have a total of S$880,000 in our SRS account when we retire. Here’s how we can breakdown the withdrawal and the applicable tax:

Total payable tax from 10 years of withdrawal plus the remaining amount in the SRS totals S$6,050.

However, let’s say we leave 0 in the account and instead withdraw everything in 10 years. Here’s what that looks like:

Withdrawing everything and leaving S$0 in your account at the end of 10 years actually increases our tax payable by another S$2,250!

So remember, spread out the amount in your SRS account as evenly as possible across the 10 year withdrawal period and the amount you’ll leave in your account at the end. That’s 11 different portions of money.

That’s pretty clean but wouldn’t the amount be increasing over time due to investments?

Yes you’re a very astute observer!

The above is a really simplified calculation. In reality we’ll be leaving the money invested in the SRS account even during the 10 year withdrawal period, so we can’t just divide by 11 since the account will likely appreciate over time and you’ll end up with more money in the account than you expect at the end of 10 years.

The true optimal approach would be to look at the amount remaining in the SRS account at the beginning of each year, divide that by the number of years left plus the amount we’ll leave in our account.

This way, we’re increasing our withdrawal amount by a bit each year depending on how much the account has appreciated.

Then in the final year, we will divide the amount into 2, one to withdraw and the other to leave in the account.

Here’s an illustration to make this easier to understand. Let’s say we have S$780,000 at the start of our withdrawal and the account will appreciate by S$10,000 at the end of each year until we complete our withdrawal. This is what it will look like if we had divided the starting amount evenly and withdrew just that over 10 years:

Dividing the starting amount into 11 equal parts and withdrawing that amount yielded a total of S$7,886 (an effective tax rate of just 0.9%) in income tax over the 10 year period!

Now let’s take a look at the optimal approach.

We will start at the same amount, S$780,000 and have the account appreciate by S$10,000 at the end of each year, however at the beginning of each withdrawal period, we’ll look at the starting amount and divide by the number of remaining periods.

Here’s the result:

With this approach, the payable income tax cost is just S$6,705.38 (an effective tax rate of just 0.76%). Saving more than S$1,100 over the previous method.

Also this works without needing you to predict how much your account will appreciate by each year.

And it will work more and more effectively the larger the funds in your SRS account becomes to help you minimize your income tax from the withdrawals. Note though that this assumes that you have no other sources of income during the 10 year withdrawal period.

Wait, if 50% of the funds withdrawn are taxed at the time of withdrawal without regard for whether they are income, capital gains, dividends or other types of gains, are we paying more tax due to the capital gains we will make on the portfolio?

Very good question. I also had the same thought as well, and it seems like Singapore government did too. Here’s the answer they provided in their SRS booklet (as of April 2019):

“SRS is a tax deferral scheme. Under a typical tax deferral scheme where a sum of money is not taxed upfront but instead taxed at a later time after netting off all subsequent capital gains and losses from investments, the individual will be no worse off than if the sum of money was taxed upfront and all subsequent capital gains were exempt from tax.”

They also provided an example calculation to demonstrate this point. You can find it on page 28 of the linked booklet above.

Although the above statement is true as it pertains to taxation, what we are missing out on is the higher potential returns by investing in investment vehicles that are not available within the SRS. Therefore, you should only really contribute into the SRS as part of your Local Funds portion of your investment portfolio.

So how do we optimise our SRS funds? My example.

Now that we know how to optimally withdraw before the statutory retirement age as well as after the statutory retirement age, let’s take a look at how we should structure our withdrawals.

The way we should go about this is really dependent upon our current situation at the time, but let’s take a look at a few rules of thumb before I dive into how I’m planning my own so you can begin planning yours.

Some rules of thumb

Due to the way the SRS works, here is a list of five things to keep in mind:

1. Do not withdraw money from the SRS before the statutory retirement age unless absolutely necessary. No point paying the early withdrawal penalty.
2. If you do withdraw early, try to remain below S$20,000 per year. This is the limit to withdraw without paying income tax.
3. Start withdrawing from the SRS as late as possible even after the statutory retirement age. Let the funds in the SRS accumulate tax-free for as long as possible. Once you make the first withdrawal, the 10-year countdown starts ticking.
4. Once you start withdrawing from the SRS after the statutory retirement age, make sure to follow the optimal withdrawal method highlighted above.
5. After you make your first withdrawal, you must continue withdrawing every year for 10 years (using the optimal method) to minimize your tax obligations.

I hope that makes sense. In order to illustrate how I’m applying this, I’ll walk you through the steps I’ve taken to figure out how I’ll be handling my SRS.

First find out how much we’ll have in our SRS

In order to determine if we can afford to not withdraw from the SRS is by figuring out how much funds we have to use outside of the SRS vs how much we have inside it.

In my case, my plan is to retire by 40. My first contribution started this year (2019) – when I’m about to turn 34 – and I’ll be contributing for at least 7 years.

After I reach FIRE I will no longer have income, so it will no longer make sense to contribute to SRS past that point.

I will also be contributing the maximum amount (S$15,300) so I can maximize the tax savings. This will result in a total SRS contribution of:

S$107,100

I’ll also be investing all of the funds into the STI ETF to form the local funds portion of my Bogleheads 3 Fund Portfolio. So let’s assume that the average returns on the portfolio – according to my 11 analysis of the average returns of the STI ETF in the last 11 years – will be about 7% per year.

Using that rate of returns for the next 7 years, the S$107,100 investments would have – in 2025 – grown to:

S$142,146.26

That’s a substantial sum, but is pretty small compared to the rest of my retirement portfolio. Since I will be completely financially independent at that point, how much does this amount contribute to the rest of my retirement portfolio?

What percentage the SRS funds compared to the rest of the portfolio at FIRE?

For those who are new here, my planned FIRE number is S$2,162,162.16. Compared to that amount, the SRS funds will make up just 6.57% of my portfolio.

Here’s what the portfolio allocation will hypothetically look like:

As you can see, the SRS portion of my portfolio makes up a part of my “Local Funds” portion of my 3-Funds portfolio.

Since:

1. I will have a large amount of funds outside of the SRS; and
2. I should not touch the SRS funds before my statutory retirement age unless absolutely necessary

I will be withdrawing my 3.33% withdrawal rate from the other parts of my portfolio until I reach my statutory retirement age.

If my overall portfolio grows at least 7% on average per year, by the time I reach the age of 62 I would still not have needed to start drawing from my SRS funds.

So let’s assume that I leave all the funds in the SRS until I reach my statutory retirement age – when it no longer incur early withdrawal fees, how much would I potentially have?

Value of SRS funds at the statutory retirement age

If I left the S$142,146.26 in the SRS account until I turn 62, at an average return of 7% per year, that amount would turn into… wait for it…

S$660,094.00!

That’s the power of compound interest over 20 years. Pretty amazing.

Anyway, so let’s say I start withdrawing right when I turn 62 and at the end of each year whatever that’s left in the portfolio appreciates by 7% (I’ll round this down to the nearest S$10 so the number is nice and round). By following the optimal withdrawal approach, this is what the withdrawal process looks like:

In my case, I will be withdrawing almost a million dollars over the course of 11 years, but due to the withdrawal strategy, I will only be liable for a tax bill of less than S$9,500. That’s an overall effective tax rate of less than 1%!

The low effective tax rate looks great, but exactly how much did we save?

To calculate exactly how much we are saving, let’s see how much the tax savings has actually grown in the SRS account over time (instead of being paid to the Singapore government.) Then we can compare it directly to the amount of tax paid at the end.

If the tax savings gets invested and grows to more than what we will pay during withdrawal, we will be better off with the SRS account.

I’ve calculate each potential investment value of each tax bracket by assuming that:

1. Each tax saving is use to buy STI ETF over 7 years.
2. The investment is left to grow until I turn 73, the date when I’ll be finished withdrawing from the SRS.
3. Investment return of 7% p.a. to keep it the same as above assumption.

Here are the results broken down my each marginal tax rate bracket:

Based on the above calculations, all tax bracket would have made money, even the 2% tax bracket – which really surprised me.

If you read the chart of the 2% tax bracket, the S$200 tax savings every year, after 7 years would be S$1,400. That amount invested until I turn 73 grew to S$14,989. After all the money in the SRS is withdrawn, I only had to pay S$9,355.93 so that’s a gain of S$5,633.

If I had instead paid the S$1,400 out in taxes, I would have completely lost that S$5,633 in future value.

This saving is even more pronounced if you are at a higher tax bracket currently. In our example the highest tax bracket (22%) would save over S$244,000 in future value! That’s pretty insane.

This is why deferring taxes with the SRS makes so much sense. So what do we need to do to get started with the SRS contribution?

How do I start contributing to and investing with my SRS Funds?

Open an SRS Account

In order to make SRS contributions, you must first have an SRS Account opened at one of 3 SRS operators in Singapore:

• Development Bank of Singapore (DBS) Ltd.
• Overseas Chinese Banking Corporation (OCBC) Ltd.
• United Overseas Bank (UOB) Ltd.

You can only have one SRS Account at any time so choose the bank you’ll most likely bank with long term. It’s possible to move your SRS Account to another operator, but better not have to go through the trouble.

Make contributions to your SRS Account and claiming tax deduction

Once you have your SRS Account opened, making contributions is quite straightforward. You will be able to make contributions using the internet banking website of your SRS operator.

Here are some points you should know about making contributions:

1. You can make as many contributions as you’d like up to the annual contribution cap.
2. You do not need to file any tax deduction claim. The SRS operator will report your contribution to IRAS on your behalf and it will be reflected in the next year of assessment.

That’s it, pretty simple. Now let’s see how we can put the funds to work in investments.

Investing your SRS funds

Once you have the funds in your SRS Account, you will be able to use it to invest by opening any of a number of brokerage accounts at one of many brokerage providers in Singapore.

In my case, I am currently using a Phillip Capital POEMs Cash Management Account that’s linked to my UOB SRS Account.

When I make a stock purchase, I can select to use “SRS” as the payment type instead of “Cash”:

This way when the purchase is made, the funds is taken from the SRS account instead of your normal mode of payment.

Once the purchase is complete, the shares will be reflected in your SRS Account instead of your brokerage’s account so you may not see it where you normally would when you check your brokerage account.

Selling your SRS Investments

Similarly, when you wish to sell your SRS investments. Log into your brokerage account, select the investment that you know you are holding in your SRS Account, enter the number of shares you’d like to sell, enter the price you wish to sell at, and select SRS as the payment type.

Here’s an example screen from POEMs:

When the sale is complete, the funds will return to your SRS Account so you can use it to make more investments. Simple!

Conclusion

So there you have it, how you can make use of the Supplementary Retirement Scheme to reduce your tax obligation and, at the same time, use it to supplement your retirement funds.

I hope that this post has been useful and interesting for you. If you have any questions that I haven’t answered here, I’d love to hear from you and maybe I’ll add it to this article.

Important: I would not pretend to say that I’ve been able to discuss all the information and details of the SRS in this article. If you wish to find out more about how the SRS works and all the different rules and special cases surrounding contributions, investing and withdrawals that was not covered here, I recommend that you check out the very comprehensive MOF SRS booklet on the MOF Website.

As always, I welcome any feedback or comments that you’d like to provide in the comment section below. You can also reach out to me directly by tweeting at me @firepathlion!

I’d love to hear from you.

Until next time.

FPL