Last week we asked you how you can use a personal loan. Turns out most of us prefer to use it for investment opportunities or not to use it at all.
While typically most low to mid-risk financial instruments cannot match the returns of loans, when applied in the right situation upfront capital can be used to generate profits worth the risk. Case in point, if you have taken up loans to invest in equities during the height of the recent recession, particularly in the US market, you would have made back your principal plus interest many times over.
This issue, Qotion will discuss the pros and cons of the Supplementary Retirement Scheme (SRS) for CPF. Created in 2001, the SRS was meant as a complementary scheme for people to save for retirement while saving on income taxes.
Here's a brief summary of the scheme. An SRS account can be opened with DBS, OCBC or UOB, and the contributions can only be withdrawn after the age of 62. Early withdrawal is permissible with a penalty fee of 5%. It offers a 50% tax relief on contributions to the account, allows you to invest using that capital, and investment returns are tax exempted.
First let's talk about the good points. This scheme offers potential savings in 2 areas. Firstly, SRS is a tax-deferral scheme which allows you to set aside part of your annual income for retirement. The tax savings for this amount will be returned as a tax relief in the next year, which helps you pay less taxes and increase liquidity upfront.
Secondly, since both an SRS and an ordinary savings account can be used for investment, you can usually get better returns via tax reliefs than bank savings interest rates. Although the caveat is that you can only withdraw the capital after age of 62 without penalty, this scheme offers a better alternative for saving a pile of cash for investment than using a savings account.
Unfortunately, the problems are significant. While SRS accounts allow you much flexibility in choosing your preferred investment product, they are not all-encompassing i.e. the range of products that can be invested are determined by the banks offering the accounts. In addition, while SRS capital can be used to purchase shares on SGX, it cannot be used for property investments. This imposes a restriction on a competent investor which may potentially curtail profits.
Also, the maximum contribution cap is set at 15% for Singaporeans/PRs and 35% for foreigners. Maximum income cap is $76,500 per annum. This works out to a maximum contribution of $11,475 per annum. The tax relief that you stand to gain depends on your income bracket and is a one-time benefit. Moreover, the tax payable is deferred, not exempted, i.e. you still have to pay 50% of it upon withdrawal after retirement. With a lower annual income and other tax reliefs e.g. NS, living with parents etc, the tax relief you gain has virtually no benefit to you. Keep in mind the opportunity cost is a lock-in period of more than 30 years.
So after all's said and done, is the scheme worth it? we would say that in order to really benefit from this scheme, you need to fulfill 3 conditions:
- You possess a high taxable annual income (more than $100,000)
- You wish to invest in SGX equities or financial products allowed by the banks offering the SRS accounts
- You do not have immediate need of the capital you invested
... And there you have it, our analysis of the SRS scheme. What's yours? Share your thoughts with us in our
question of the week!
Have a good weekend!
