There are numerous risks to take note of when planning for your retirement.
One example is longevity risk, where one outlives their life expectancy and requires more funds to finance their expenses in retirement.
Other threats include rising inflation which will lower the purchasing power of your savings.
Market volatility is yet another risk that could abruptly lower the value of your investment portfolio just when you need the money.
Clearly, you can never be too prepared when it comes to saving up for old age.
To encourage Singaporeans to further build up their retirement nest eggs, the Singapore government devised the Supplementary Retirement Scheme, or SRS.
In this article, we provide an overview of the SRS account and introduce some potential investment options for it.
Introduction to the SRS
The SRS is a voluntary savings scheme that is meant to work alongside your Central Provident Fund (CPF) account to boost your retirement savings.
Funds deposited into your SRS account will earn interest of 0.05% a year, but can also be used to invest in various financial instruments.
Your investment options include unit trusts, index funds, blue-chip stocks, and others.
As an additional cherry on top, you get to enjoy dollar-for-dollar tax relief on the funds deposited in the SRS, up to a maximum of $15,300 a year.
The SRS also offers greater liquidity than your CPF monies.
SRS funds can be withdrawn at any time, although a 5% penalty applies.
Taxes will also be imposed on withdrawals made before the statutory retirement age of 62 years old.
The withdrawal penalty and taxes will be waived if you are withdrawing SRS funds for medical purposes or due to bankruptcy.
The requirements to open a SRS account are fairly straightforward.
You need to be at least 18 years of age, not be an undischarged bankrupt, not have any mental disorders, and be capable of managing yourself and your affairs.
If you meet all the above conditions, you may go ahead to apply for an SRS account.
You may do so with either of the “big three” local banks, namely DBS Group (SGX: D05), OCBC Ltd (SGX: O39) or UOB Ltd (SGX: U11).
The three banks are the only ones operating SRS account services, and accept applications on their respective mobile and internet banking sites.
However, do take note that you should only apply for a SRS account with one bank.
Each individual is only allowed to own one SRS account, and your application may be rejected if you have a pending application with another bank.
Buying stocks with SRS
Once your SRS account is opened, you can make contributions to top-up the account and start investing.
When it comes to shares, you are allowed to invest SRS monies in blue-chip companies listed on the Singapore Exchange (SGX: S68).
The impressive list of blue-chip companies available should cater to your investment preferences.
For those who prefer a reliable name to invest in, the three aforementioned banks make good candidates, in addition to SGX stalwarts such as CapitaLand Investment Limited (SGX: 9CI).
If you want your investments to produce a steady stream of income, you may also consider investing in REITs.
REITs such as Ascendas REIT (SGX: A17U) and Mapletree Industrial Trust (SGX: ME8U) are backed by strong sponsors and deliver a consistent distribution.
Get Smart: Seize the moment
From 1 July 2022 onwards, the retirement age in Singapore will be raised to 63 years old.
The retirement age could be increased further to 65 by 2030.
This means that should you open an SRS account and make your first contribution only after 1 July, you will need to wait an additional year before being able to withdraw your funds with tax-free status.
You can even make a contribution of as low as S$1 to “lock in” your penalty-free withdrawal age at 62 years old.
There really is no excuse not to open an account sooner.
And if you have spare cash lying around, you can kill two birds with one stone with the SRS account – enjoying tax reliefs and making your money work harder for you.
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Disclosure: Herman Ng owns shares of Ascendas REIT and Mapletree Industrial Trust.