Tuesday, February 17, 2015

Add value to SRS

FEB 17, 2015


RESPONDENTS to a recent DBS Bank study on retirement planning say they expect to have an average of $3,500 a month over 15 to 20 years to cover spending in their golden years.

But this sum is considerably higher than the monthly payouts as envisioned by the Central Provident Fund (CPF) review panel charged with revamping Singapore's retirement system. Those payouts range from $650 to $1,900 to cover a person's basic needs, depending on whether he chooses to lock away a basic sum of $80,500, a higher sum of $161,000, or an enhanced sum of $241,500.

As such, it is obvious that unless Singaporeans make efforts to build a much bigger nest egg than what they now put aside in their CPF accounts, they may find themselves having to work well beyond their retirement age, or facing the daunting prospects of running out of money and downgrading their lifestyles during retirement.

Fortunately, there is another savings mechanism - the supplementary retirement scheme (SRS) - which was established 15 years ago specially to encourage voluntary savings for retirement.

Anyone, including foreigners, can open an SRS account at a local bank. Every dollar put into the SRS account is free of tax. This reduces a person's taxable income, so lowering the tax bill.

Singaporeans can put up to $12,750 a year into their SRS account. For foreigners, the sum is $29,750 as they do not contribute to the CPF.

Yet, despite its attractions, the SRS has attracted only 91,652 savers between 2001 and 2013. That is a pity. Some will say this is because 60 per cent of Singaporeans do not pay any income tax and hence have no incentive to make an SRS contribution.

[Not true. Only about 35 - 40% don't pay tax. But another 40% or so don't pay enough tax to make it worth the while to contribute to the SRS. IMHO]

But there are about 750,000 taxpayers with assessable income of $50,000 or more who would be able to enjoy some tax deduction if only they squirrel away their savings in an SRS account.

[At $50k assessable income, you may end up with $40k chargeable income, and pay about $550 in taxes. Your tax rate below $40k is 3.5% or less. Above $40k, it is 7%. It is only after $80k that your tax rate hit 11.5%.

IMHO only if you have more than $80k chargeable income does it make sense to contribute to the SRS. But this is my opinion. You may have a lower threshold. At $80k, your tax is $3,350. After that, every $10k is $1150 in tax. Put $10k and you save $1150.]

This is the group which we would identify as PMETs (professionals, managers, executives and technicians) making up the backbone of our middle class, and who find themselves sandwiched between raising a family, taking care of their elderly parents and servicing a big home mortgage. They also deserve a helping hand to save for their retirement.

[Which is also why they may not be able to afford to put away money in the SRS.]

As an incentive to enrol more SRS savers, PWC's personal tax director Girish Vikas Naik suggests a higher tax deduction on such contributions, saying: "If a Singaporean knows he can offset $1.50, or even $2, for every dollar he puts into the SRS against their taxable income, more will join. The annual contribution cap of $12,750 can be raised to match rising living costs."

The other drawback is that, unlike the CPF where members' contributions are pooled before being handed to the GIC for investment, SRS savers are left to their own devices as to how they can invest the funds.

Not surprisingly, more than one-third of SRS funds, or $1.47 billion, was left idling in cash, as at end-2013, even though this earned almost zero returns in the low interest rate environment.

As such, one big draw would be to provide SRS savers with options such as inflation-indexed bonds, life-cycle funds or other passive low-cost funds which they can invest in to try to get a higher return, without requiring the financial know-how on what to invest in.

Another change needed is to extend the withdrawal period.

After reaching the mandatory retirement age (now 62), an SRS saver can phase out his withdrawals of the money over 10 years to reduce his annual tax bill.

But the Singaporean's average lifespan has lengthened - from 76 years in 2001 to 83 now.

SRS withdrawals should be staggered over a longer period - say, 15 to 20 years - to ensure that a person does not run out of money during his retirement.

Bringing the SRS into the debate, and improving the scheme, may help one large segment of Singaporeans save more for retirement.

[Sure. Give more tax deductions, and provide investment options and let SRS savers have more time to draw down on their savings. All good suggestions. I'm sure there are costs for the govt though.]

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