Martin Lee @ Sg
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SRS Tax on Investment Gain

There was an article by Larry Haverkamp on SRS in today’s Sunday Times which argued that SRS works best for the rich. While this is true, I would argue that SRS is beneficial for most people who pays taxes as long as cashflow and liquidity is not an issue.

If you can get an immediate 5% return just by contributing to SRS, why not?

Larry gave an example of a 22 years old man earning a taxable income of $100,000 with a $10,000 annual contribution.

By contributing to SRS, the person can save $1,400 in taxes every year. Over 40 years, this works out to be $56,000.

Assuming the SRS grows at 7% p.a., the SRS savings will grow to be almost $2mil (or $2,136,096) at the end of 40 years. If one withdraws $200,000 over the next 10 years, he needs to pay tax of $7100 per year. This works out to be a total of $71,000.

At first glance, it appears that the person has ended up paying more tax due to the good performance of his SRS account. As all the investment gains is being taxed, it might also seem that SRS imposes a capital gains tax and tax on dividends.

While this might be true indirectly, we should also bear in mind that $1000 tax paid today and $1000 tax paid 40 years later have a very different value.

Remember that all your deferred tax is generating compounded returns before it is taxed in the future.

The easiest way to illustrate using the above example is to see how much savings you would have after 40 years if you had not contributed to SRS and managed to grow it at 7% p.a.

Since you have to pay tax of $1400 every year, you can only save $8600 (compared to $10,000 if you had contributed to SRS). Compounded at 7% over 40 years, this works out to be $1,837,042, which is about $299,000 less than your SRS total return.

Put it another way, you can afford to pay almost $30,000 in tax every year during your SRS withdrawal and there would be no difference whether you contributed to SRS or not.

However, in the example where $7100 tax was paid each year during the SRS withdrawal years, the person would be very much ahead.

Due to the fact that half of the SRS withdrawal amount is not taxable, probably the only time a person can be worse off contributing to SRS is when his tax rate at retirement is twice that of his income generating years.

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8 comments
Jasmin says 7 years ago

I view SRS as another way to set aside some cash meant for retirement. Imagine each year I put aside 10k, after 15 years, it would be a tidy sum of 150k for retirement but not forgetting inflation.

Reply
    The Watchman says 7 years ago

    And let your saving compound at 7% rate of return you beat inflation and accumulate REAL wealth which unfortunately many only preserve at best and worse many many have lost to inflation and get negative return, ie they are no better off than before and maybe even worse off like saving in wholelife insurance or endowment.

    Reply
Question says 7 years ago

A thought suddenly struck me while reading your article.. correct me if I’m wrong. Would that make SRS a better alternative than an insurance plan? Ie to save for retirement, use CPF and SRS, and buy term insurance for risk management. Your thoughts?

Reply
    lioninvestor says 7 years ago

    Dear Question,

    SRS is just an instrument for tax deferment. With the money inside SRS, you can actually use it to buy various investment/insurance products that can meet your needs.

    For example, if you already planned to buy an single premium insurance policy as part of your retirement planning (which you will only need after retirement), you can contribute to SRS before buying that product. Of course, that product has to be SRS approved for it to work.

    I generally don’t use a whole life plan to accumulate savings for retirement.

    Reply
Nuts says 7 years ago

I would say that most Singaporeans who contribute to SRS are mainly using it as a Tax-Saving Device. Their SRS money are mainly put into very low-yielding FDs, money market, and bond funds (preferably S’pore bond funds) and structured deposits.

Very few SRS contributors will be able to invest and achieve a compounded return of 7% or even 6% over 30-40 years. Hence the amount they withdraw each year over 10 years will likely not attract much income tax, if any at all.

As for future tax regime in 30, 40 years, even the forecaster extraordinaire also cannot predict. If policy is still sama-sama then probably first $50K income not-taxable. If policy becomes like some western countries where minimum 30% tax even on the first $1K income, then something major has happened in S’pore liao.

Reply
Jasmin says 7 years ago

I contribute to SRS. My only concern is when I make withdrawal at age 62, how much tax would I be paying? Rules may change over a period of years.

Reply
The Watchman says 7 years ago

I must stress here that SRS is not intended as tax saving scheme.It is intended to incentivise saving. As all schemes they favour the rich and that is why the SRS formula, like the CPF contribution formula, was revised into a flat one and anyone who has $11750 or less can save in it. It mustn’t be touted as a tax saving scheme only without the caveat that if one has liquidity problem it is not for him or her.
In its original form it was exploited by the rich. it is still exploited by the rich but with a limit. Like its cousin the original CPF contribution scheme was exploited and abused by the rich.Now the contribution has been capped
It will NOT benefit everyone , so don’t make it as if it is tax saving planning tool.

Reply
    lioninvestor says 7 years ago

    Yes, the caveat is liquidity which I have mentioned upfront.

    Reply
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