How to reduce tax liability on SRS?

Aarron Low wrote in the Sunday Times an article on Supplementary Retirement Scheme (SRS) dated 14 October 2012. This scheme is meant to encourage private savings for retirement. This supplements the compulsory Central Provident Fund (CPF).

To encourage take-up of SRS, the amount saved goes towards reducing your personal income tax liability during the year of contribution.

The scheme was started in 2001 and for six years, I set aside sums of money into this account to the tune of $77,500. I stopped contributing when I left my full-time employment in 2007. The total taxes saved were $5,900 based on my personal effective tax rates.

Besides taxes saved, the sum in the SRS had grown by $6,800 to $84,300 based on my latest statement. Without accounting for time value of money, the lump sum benefit for the scheme was $12,700 ($5,900 + $6,800).

Let’s discuss the negatives of the scheme and ways to address them.

1. There is a 5% penalty for pre-mature withdrawal of money from SRS. Pre-mature withdrawal is defined as withdrawal made before statutory retirement age (currently at 62 years). Besides penalty, the full amount withdrawn is treated as income for the year and taxed accordingly as personal income. One should not withdraw before 62 years old to avoid penalty.

2. The scheme allows contributor to withdraw after 62 years old without penalty and the withdrawal can be staggered over 10 years after the first penalty-free withdrawal. If withdrawal is made, MOF/IRAS allows 50% tax concession on the amount withdrawn. Let’s take an example. If one withdraws $10,000 after age 62 years old and is the first penalty-free withdrawal, half of $10,000 is treated as income for the current year of tax assessment together with one’s other incomes such as salary, property income, etc. This 50% is considered a concession because this is less than whole 100% that is taxable under normal circumstances.

One can do tax planning under this environment. You can minimise tax by ensuring you do not withdraw a sum as to raise your chargeable income to beyond $20,000 for a single year. Note that chargeable income below $20,000 for a particular year is not taxable under our tax regime. So you have 10 years to do tax planning

3. The third drawback is that there is risk in investing SRS monies. It is harder to keep the principal sum of contribution intact and much harder to earn a decent return on this SRS amount in this environment. A bad misstep can lead to substantial losses in its investment value. This SRS amount is hard-earned money and careful investment is called for.

Having these drawbacks in mind and on balance, SRS is a scheme to encourage savings for retirement and in the process saves some taxes.

Copyright © 2012, limkimtong for Living Investment

The material presented is intended to be general and written in layman’s language as much as it is possible. The author shall not be liable for any direct or consequential loss arising from any use of material written. Please seek professional advice from your financial advisor or financial institutions on material written covering financial matters.

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