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Supplementary Retirement Account : Does it always work out better for you ?

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Old 09-02-2011, 06:04 PM
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Default Supplementary Retirement Account : Does it always work out better for you ?

Hi,
I like to start a new thread on Supplementary Retirement Account(SRS) and see if anyone has any views on this.I read in the papers that SRS is deferred tax saving plan and most of what is written in the newspaper seem to think this is a really good idea for high income earners..

Well, i read the FAQ from the SRS guide and I thik spotted something on the capital gain part that really intrigued me. This was what was stated in the FAQ.

Quote Question 74
“74. 50% of SRS withdrawal is taxable without distinguishing capital gains, income and contribution. Is the Government taxing capital gains with the introduction of SRS?

SRS is a tax deferral scheme. Under a typical tax deferral scheme where a sum of money is not taxed upfront but instead taxed at a later time after netting off all subsequent capital gains and losses from investments, the individual will be no worse off than if the sum of money was taxed upfront and all subsequent capital gains were exempt from tax.
As an illustration, consider a person who has an earned income of $10,000. Assume his marginal tax rate is 10%. He pays an income tax of $1,000 and invests the balance of $9,000. He makes a capital gain of 3% each year until he reaches the retirement age 10 years later. Assume his marginal tax rate remains at 10% at retirement. At the end of 10 years, he will have a total of $12,095.
Total = ($10,000 * 0.9) * 1.03 * 1.03 *….(for 10 years) = $12,095
Next, consider another person with the same earned income of $10,000 but who invests the sum under a tax deferral scheme. He does not pay income tax on $10,000 and is able to invest the full $10,000. He makes the same capital gain of 3% each year until he reaches the retirement age 10 years later. The capital gains accumulate tax-free in the account. At the end of 10 years, everything in the account is taxed at the same marginal tax rate of 10%. After paying tax, he will also have a total of $12,095.
Total = $10,000 * 1.03 * 1.03 *….(for 10 years) * 0.9 = $12,095
In fact, under the SRS, the individual will be better off, as only 50% of the withdrawals will be taxed. The same person above will have a total of $12,768 if he withdrawals everything in the first year of retirement.
Total = 0.5 * ($10,000 * 1.03 * 1.03 *….(for 10 years))
+ 0.5 * ($10,000 * 1.03 * 1.03 *….(for 10 years)) * 0.9
= $12,768 “
Unquote.

When I saw the calculations, I was really intrigued.

So i did some of my own calculations and I think I see a possible problem that SRS is not always “no worse off” because my calculation shows that those whom do manage to earn a very high return on their SRS account may be taxed higher. Extreme high returns can be possible because SRS allows account holders to invest in equities.

To give a snap shot of my calculations/scenario, assume a middle age person of 36 and contributing the max level of 11,475 per year for 30 years . As there may be many variation on tax calculations for this individual, let just assume this is relatively high income earner(above S$160k) and his marginal tax rate is 17% for this 11,475.

Based on the above scenario, if this person earns a capital appreciation of 12% on his SRS portfolio per year, my calculations shows that he will have a total SRS portfolio of around $2.77 million at end of 30 years with a total tax savings of S$58.5k for 30 years of contribution.

Because of the restriction to withdraw everything under 10 years, and in terms of optimal tax planning, he should withdraw a total of $251k each year for 11 years (11 year, he needs to withdraw everything)

Going through the 50% tax benefit + the fact that first 20k tax income incur zero tax, we can see that he will be taxable income will be 105k (251k *50% - 20k) at a estimated effective tax rate of around 9.6% which works out to be $10k per year.

And if all this is correct, then his tax cost for 11 years of withdraw is around $123k in total Hence his tax cost of $123k vs savings of S$58.5 k will mean he may have been better off just paying his marginal tax rate per year.

There are many assumption in this case , especially tax rate. But I am wondering if my above suspicion that SRS may not be beneficial for extreme high capital gain returns individual is correct.

Any SRS account holders or specialist care to comment ?

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Old 10-02-2011, 10:36 AM
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Have you read the following blog posts and their comments?

What’s not good about Supplementary Retirement Scheme (SRS) | Salary.sg - Your Salary in Singapore

Mr Wang Says So: The Supplementary Retirement Scheme

What I think is that in general, if you are a high earner you will benefit from SRS. But based on your analysis, it seems if a high earner who's also a very good investor may not benefit from the scheme.

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Old 10-02-2011, 05:12 PM
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I disagreed with the first post.
If someone is bad in investing, please do invest in SRS.
You save on tax which is like 10% upfront. And since that person is bad on investing, it better to lock it away then lose the money.

Yes, generally a higher income earner will save on a "higher" marginal tax. That part of SRS is true.

After some further thought, i suspect the issue is also maybe because the SRS faq used 10 years in investing and compared it to 10 years of withdrawal.

It is a different story if you invested 30 years where you get 1.03 ^30 x0.9 and forced to withdraw it within 10 year time frame. At 3% capital gain, i think the other benefits like 50% taxable and first 20k non taxable still offset so you end up saving more. But if you have a high capital gain of 12% , then the size of the SRS may grow to such a high amount it may not be so beneficial.

Anyone else care to shout out ?

Is there a limit to the size of SRS portfolio may grow to ?






Quote:
Originally Posted by Unregistered View Post
Have you read the following blog posts and their comments?

What’s not good about Supplementary Retirement Scheme (SRS) | Salary.sg - Your Salary in Singapore

Mr Wang Says So: The Supplementary Retirement Scheme

What I think is that in general, if you are a high earner you will benefit from SRS. But based on your analysis, it seems if a high earner who's also a very good investor may not benefit from the scheme.

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Old 14-02-2011, 02:09 PM
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please refer to MOF website
Ministry Of Finance - Our Policies

it says
"The SRS offers attractive tax benefits. Contributions to SRS are eligible for tax relief, investment returns are accumulated tax-free and only 50% of the withdrawals from SRS are taxable at retirement (referred to as a “50% tax concession”).
"

i emailed MOF, they refer me to IRAS
and IRAS did not reply my query "Is SRS capital gains tax-free" directly

so, my conclusion is the same as yours, a good investors will pay more tax thru SRS
then again, in the later years, you can manage the contributions and withdrawal to derive max benefits (or lowest tax)

and of course, its unlikely to get consistently good ROI for 30yrs.
for me, after 6yrs, my SRS balance = my contributions
last few years were tough
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Old 15-02-2011, 11:15 AM
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ha ha.. cool..

ok. so really time to get experts to opine on this subject...


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Old 28-02-2011, 01:14 PM
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Quote:
Originally Posted by lazyplane View Post
Hi,
But I am wondering if my above suspicion that SRS may not be beneficial for extreme high capital gain returns individual is correct.
I believe you are right. You can end up paying more tax on your SRS account compared to making the investments directly. The thing about SRS, as you said, gains are not distinguished between gains on the revenue and capital accounts. All SRS withdrawals upon retirement will be taxed at 50% of amount withdrawn. In contrast, capital gains on investments are not taxable.

The SRS scheme favours individuals who are about to reach retirement. Say, 55 years where the person can benefit from the immediate tax savings while not having to pay much tax upon retirement as his capital gains over the 7 year period, when he can make withdrawals at 62 would not be as significant. I believe it is a less attractive saving scheme if you are still in your 30s as the opportunity costs of placing your money in the SRS might outweigh the benefits. Early withdrawals will result in increased tax liabilities and penalty fee of 5%.
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Old 28-02-2011, 06:27 PM
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With the recently announced personal income tax rebate and reduction of personal tax rates, it may no longer benefit middle income earners to participate in SRS, since there is now less tax benefit to counter the many disadvantages such as locking up your funds for a long time, capital gain are taxable etc

We should re-calculate our sums using the latest info instead of relying on the outdated info in the above-mentioned blogs.

Agree to the comment that one should participate in SRS when nearing retirement since one's income is at the highest and the tax benefit from SRS will be the most. The money will not be lock up for too long. There will be less time for capital gain to compound, resulting in a withdrawl amount large enough to attract a tax, thereby negating the SRS tax benefit at the time of contribution.
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Old 28-02-2011, 10:53 PM
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redid the sums.... more certain that if u r young eg 30 plus n putting money in srs then really, this may not be too good.....

and if u r a woman with like 2 kids, then u must really earn a lot like above 15k to get any significant benefit from srs.....

the lower income tax is a double edged thing in srs.... it allows u withdraw at lower cost ....
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