SRS Withdrawal – Is There an Easy and Organised Way to Work Within the 10-Year Tax Concession Period
A discussion I have with a friend:
Mr Friend: Bro, you know I have started contributing to the SRS.
Me: Congratulations. You must be earning good income!
Mr Friend: It’s ok. Just want to set aside some money for retirement and save some taxes.
Me: That’s the purpose of the SRS.
Mr Friend: From what I understand, it’s a good scheme. But managing the withdrawal during the tax concession window sounds a bit daunting.
Me: Oh why so?
Mr Friend: Like if I forget to sell my investment periodically for withdrawal? You know I am not very organised.
Me: There may be a solution for you.
Many of us contribute to the Supplementary Retirement Scheme (SRS), with the intention of setting money aside for our retirement needs, as well as gaining a tax advantage in the process. However, this entails that we put some thought into the drawdown of our SRS funds upon retirement, considering both our cash flow needs during our golden years as well as the tax concession rules around SRS withdrawal.
As a reminder (refer to Chart 1 below), with the SRS, we get a tax concession period of ten years beginning from the date of the first withdrawal, at or after the statutory retirement age (age 62 currently). Only half of the withdrawn amount from the SRS account will be subject to tax assessment, hence it is possible that someone, without other sources of chargeable income in retirement, is able to enjoy the withdrawal entirely tax-free. Planning here is therefore key to ensure there is no leakage of financial resources through tax on SRS withdrawal.
As of today, the first $20,000 of chargeable income is tax free (refer to Table 1, downloaded from IRAS website) so in practice, someone can be withdrawing $40,000 from SRS, and get away with paying no tax if that withdrawal is within the tax concession window, assuming no other sources of chargeable income.
You can of course, manage the entire SRS process, including the withdrawal phase, yourself. There are a few issues you should consider where the withdrawal phase is concerned:
- How disciplined are you in terms of sticking to the 10-year tax concession period?
- How organised are you? Are you able to decumulate (converting assets into income) in a structured manner? Are you able to liquidate your SRS investments or other financial instruments periodically?
- Do you have the stomach to ride financial volatility during the withdrawal phase, and even take significant losses to work within the 10-year tax concession period?
If the answers to the above are far than convincing, you may be wondering if there is an easy and hassle-free way to enjoy regular SRS withdrawal such that we are able to pad out the withdrawal over the tax concession window to minimise or even eliminate tax exposure. Is there a way to navigate process this without fuss?
An Easy Solution to the SRS Withdrawal Conundrum
Enter insurance income plans. These plans enable people who have contributed to SRS, to utilise the SRS money to generate a regular income, and within the 10-year tax concession period. This gives the person the certainty of an income at his chosen 10-year period after the penalty-free SRS withdrawal age, regardless of the health in the financial markets.
The decumulation of the SRS money is thus, programmed. The person will be able to utilise the withdrawal of SRS money to supplement CPF Life or other streams of income for his retirement, on a fuss-free basis. SRS money deployed in such insurance incomes plans can be capital-protected, so long as the policyholder avoids surrendering the plan early.
Allocating SRS money into insurance income plans, or rebalancing, is a key component of the SRS journey, and helps reduce the level of risk to the person as he edges nearer towards retirement. The precious commodity that is the peace of mind, becomes attainable.
Are there any drawbacks?
The main one would be that a person participating in such insurance income plans will not be able to surrender early, or risks losses on his policy. This drawback though, can also be construed in positive light in that it imposes the discipline to set aside the SRS money for retirement.
The other shortcoming relates to the yield. Insurance solutions are not, and have never been, designed to provide participants with yields at dizzying heights. They are intended to provide people with a safety net, and for the SRS, that policyholders will never lose should they see the plan through its finality. Through insurance income solutions, policyholders should also get a return higher on their SRS than fixed deposit, while insulating against poor investing decisions.
Policyholders investing their SRS in an insurance income plan may lose out in an equities market bull period; but by the same token, they will be cushioned against a big fall should markets tank.
Guide to SRS Approved Solutions
There are many things for a retiree or would-be retiree to consider, and certain things in financial planning for retirement can be simplified. One area of consideration, for those who contribute to SRS, is optimising the withdrawal.
There are many avenues out there which focus on investing the SRS contribution, but few put emphasis on the drawdown of the SRS account.
If you would like to understand which insurance income solutions can help you navigate the withdrawal process and put some structure, you can download this guide to give you an idea of the plans are that SRS-friendly. You will find these features in the insurance income plans:
- An income payout period of 10 years, in line with the SRS tax concession window
- Guaranteed capital upon maturity
- A minimum accumulation period of 5 years before payout; hence early planning and participation is key
- Death benefit, which provides additional protection for dependents
- Disability payout
To conclude, for someone contributing to SRS, the withdrawal phase should constitute a big consideration. One mechanism to manage the withdrawal process is to leverage insurance income solutions. This will render the withdrawal amount to be regular, predictable, and within the scope of the 10-year tax concession period.
The insurance income solution organises the withdrawal, and provides a line of sight of SRS money coming in. With that taken care of, there is only one burning question: How do you then spend the SRS money and lead life as a fulfilled retiree?!
Article by Leon Loh
The writer is a financial consultant representing GEN Financial Advisory Pte Ltd