I have just opened my Supplementary Retirement Scheme (SRS) account. Previously, I was actually on the fence about opening a SRS account. As the SRS is a tax-deferred account, money placed into the SRS account has the advantage of being deducted from your chargeable income, thus reducing your taxes payable for the assessed year. The investment gains in SRS are also tax free, similar to investment gains from cash. The downside to the SRS scheme is its illiquidity; the money in the SRS account will incur a 5% penalty (and your prevailing personal income tax) if you withdraw them before the statutory retirement age.
This penalty and having the money locked in weighed heavily on me, which was why I did not open a SRS account all this while even though I have known about SRS for a long time. When I was younger, I wanted all my investments and monies to remain relatively liquid and hence not subject to any lock in and penalties. However, I have reached a stage now in life where I recognise that there can be some monies which I will truly set aside for retirement and that I will not touch these monies for the long term.
This is the crux of what SRS is all about. If you are not sure if the monies you are placing in it are going to be meant for your retirement, then don't do it. If you are later forced to withdraw the monies because you need it, you will incur penalties and regret even placing the monies in the SRS account in the first place. However, if the money truly is meant for retirement and will only be withdrawn during retirement, then not only is there no penalties, you get a tax savings now. On top of that, when you withdraw your monies, only 50% of it will be taxed. Furthermore, by the time you retire, you will have little to no income, so the effective tax rate you will be paying then will be much lower than when you are drawing a regular salary.
The amount you place into SRS will not be large. It is meant for additional funds, and it will certainly not form the main basis of your retirement funds. Nevertheless, every little bit helps, and the tax savings in the meantime will also come in handy. Another thing to think about is the type of returns you are receiving from the monies you place in the SRS account. Unlike monies in CPF, monies in SRS are not going to earn relatively high interest rates from staying in the SRS account. They will be earning the interests akin to a normal bank savings account. This is very low and clearly below inflation rate at this point. So, if you have the intention to place monies into an SRS account, then you definitely need to think about how to invest it.
There is a large range of unit trusts available for SRS investing. These range from bond funds, to balanced and equity funds. So, it is not difficult to form a well diversified portfolio for long term investment. Once I place some monies into my own SRS account, I will also invest them into unit trusts accordingly.
Another question to consider would be what if I was so successful in accumulating wealth that I could afford to retire earlier than the statutory retirement age? This was also one of the reasons I did not open a SRS account until now, because I fully intended to accumulate enough to be able to retire early if I wish. However, I have come to appreciate that the name SRS itself has the word "supplementary" in it. It is meant to supplement your retirement funds. It can never be treated as the sum total of your retirement fund in the first place. So, even if I do choose to retire early, before the statutory retirement age, there will certainly be other monies I can and should be tapping into at the early part of my retirement. The monies that have accumulated in my SRS account can stay there until I am past the statutory retirement age, after which they can be safely withdraw without incurring any more penalties.
I view retirement as an ongoing process. Some people want to keep active and may choose to have a part time job which helps cushion the draw down on their retirement monies. Also, it is good to have multiple sources of wealth to draw upon when you retire. This will then include your SRS, CPF, cash investments and even your house. Thus, with multiple possible sources of wealth to draw upon, it may then not be necessary to use your SRS monies at all until you are past the retirement age. Once seen in this light, the long lock in period, and the penalties of early withdrawal will no longer matter.
SRS is a good tool for setting aside some monies for retirement. But you must be clear that such funds will be strictly used for retirement only. We are also coming to the end of the year, when it will be time to look at our various portfolios and think about rebalancing them. It has been an eventful year with ups and downs. So, as we move towards the end of 2013, it is a good time to reflect on how the year has been, look forward into the new one, and also to look critically at your portfolio to see if there are any changes that need to be done!