Firstly, you can only enjoy up to $7,000 in tax relief. If you are a high-income earner, you may want to consider other alternatives.
Secondly, the investment products offered under CPF Investment Scheme (CPFIS) for SA are highly restrictive. You can only invest in products such as fixed deposits, Singapore Government Bonds and Endowment Insurance Policies. You may refer to the list here.
Given the restriction for SA, most CPF members would not invest their CPF SA savings due to the limited selection of products available. This makes a lot of sense considering that most products offered under SA have risks involved and would have difficulty matching the 4% p.a. interest offered by CPF.
The alternative method would be to top up your Supplementary Retirement Scheme (SRS) account.
Supplementary Retirement Scheme
The SRS is a voluntary saving scheme to encourage Singaporeans to save more for retirement.
Similarly, contributing to your SRS account offers attractive tax benefits. For Singaporeans, you may contribute and enjoy up to $15,300 in tax reliefs. The sum for foreigners goes up to $35,700.
This means that if you are a high-income earner being taxed at 22%, contributing $15,300 would provide you tax savings of $3,366 ($15,300 x 22%)!
Withdrawing your SRS
You can make withdrawals from your SRS account over 10 years from the date of your first withdrawal.
Unlike our CPF, it is possible to withdraw your SRS funds before the statutory retirement age (at age 62) with a 5% penalty imposed and 100% of the amount withdrawn will be taxable. The penalty for early withdrawal will not apply if it is on medical grounds.
If you withdraw after the statutory retirement age, there will be no penalties and only 50% of the amount withdrawn is taxable.
Here is the catch—it’s possible to avoid paying taxes altogether!
Or at least reduce the amount of tax payable.
Nope, it’s not illegal. It’s just a matter of spreading out your withdrawals.
Assuming you only withdraw your SRS post-retirement, in other words, you no longer draw an income. You may withdraw $40,000 from your SRS annually, for 10 years, tax-free!
There’re 2 factors here:
(1) The first $20,000 of chargeable income is taxed at 0%.
(2) Only 50% of your SRS funds are subject to tax.
Hence, if you may withdraw up to $40,000 annually, with only 50% of it subject to tax at 0%, it is essentially tax-free.
You may read more about the different withdrawal scenarios here.
Growing our SRS
Here is the thing—unlike your CPF SA which earns 4% per year, the interest rate on SRS funds is fixed at 0.05% per year. Considering the opportunity costs, it would be a terrible idea to not invest your SRS funds, especially if you have a long runway.
The good news is that SRS allows us to invest in a wider range of products when compared to CPF SA. This includes bonds, Singapore Government Securities (SGS)/Singapore Savings Bonds (SSB), fixed deposits, foreign currency fixed deposits, shares, single premium insurance and unit trusts.
An affordable and convenient way is to invest your SRS funds with MoneyOwl to grow your retirement fund.
Before we begin, it is important to note that investing is not for everyone. It is important to take factors such as your investment horizon, liquidity needs and risk tolerance into consideration.
If volatility keeps you up at night and you will need retirement savings in the near term, topping up your CPF would be the better alternative. To reiterate, CPF SA offers a decent 4% p.a. risk-free returns with up to $7,000 in tax savings.
Investing your SRS with MoneyOwl
As an NTUC social enterprise, MoneyOwl’s mission is to empower people to make wise money decisions. One of the ways they do this is through their fundamentally sound portfolios.
For a limited time, MoneyOwl is giving away eCapitaVoucher worth up to $200 for clients who invest their SRS funds on its platform before 31 Dec 2021!
Dimensional: Funds will be invested in a globally diversified portfolio to grow your wealth.
WiseIncome: Get regular payouts for your retirement or other needs.
WiseSaver (not eligible for promotion): Park spare cash
MoneyOwl Dimensional provides five portfolios, depending on your risk tolerance and investment period:
Conservative: 20% equities, 80% bond
Moderate: 40% equities, 60% bond
Balanced: 60% equities, 40% bond
Growth: 80% equities, 20% bond
Equity: 100% equities, 0% bond
You can do a quiz here to find out which portfolio suits you.
MoneyOwl WiseIncome provides three payout options to cater to your needs at various life stages:
Grow & invest payout: Focus on building assets & start payout later
4.5%* p.a. Income payout: Balance between income & leaving a legacy
8% p.a. Income payout: Maximise income drawn today
*While the fund intends to distribute 4.5% p.a. payout, the fund manager has the discretion to deviate from this including reducing the payout rate to achieve sustainability of the fund in the interest of unitholders, or alternatively, paying a higher rate of up to 4.8% p.a. in good years.
MoneyOwl WiseSaver is a fund that invests in Singapore Dollar bank deposits. This is a low-risk investment and the current rate is at 0.37% p.a. (as of 30 Sep 2021).
Firstly, I enjoy stock picking and generally do not invest in funds with the exception of my CPF OA and SRS account. The reason is that we can only invest in Singapore listed stocks using those funds and generally, the Straits Times Index (STI) has been severely underperforming, and for good reasons.
I’m not saying that we can’t make money with Singapore-listed stocks, but when it comes to investing, I prefer to invest overseas in high-quality companies such as Amazon, Apple, etc. As Buffett says, “the first rule of fishing is fish where the fish are.” With funds such as MoneyOwl Dimensional, I’m able to circumvent the limitation of investing in Singapore stocks with my SRS funds and gain access to a low cost globally diversified portfolio.
Secondly, my personal rule-of-thumb would be to invest for capital growth instead of income if you are younger, with 10 years or more till retirement.
Readers of my article on income investing would know that I echo Terry Smith’s thinking that we should focus on total returns—returns from share price increases and dividends—and not just dividend returns alone.
And generally, investing in a globally diversified portfolio (i.e. dimensional portfolio) would bring higher total returns compared to a portfolio of predominantly income-generating assets.
That said, I have a long duration (more than 30 years) and a stomach for volatility. If you need help deciding which portfolio, the quiz on MoneyOwl’s platform here is a great starting point, or alternatively, you may arrange for a phone call here.
There’re predominantly two ways to reduce taxes and invest for your retirement: (1) Topping up CPF SA and (2) Topping up your SRS account & investing them. With services such as MoneyOwl, we are able to invest our SRS funds into a diversified portfolio with low fees.