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Tea with Matthew Seah: Lifelong income with the SRS.

Thursday, January 8, 2015

Our guest blogger, Matthew Seah, has kindly obliged to elaborate on how funds in our SRS account could be used to provide us with lifelong income:

If we should have much more than $400K ($40K x 10 years) in our SRS accounts by the time we retire at 62, we would have to pay some income tax as we withdraw the funds from our SRS accounts over the next 10 years. (For more details on this, see related post at the end of this guest blog.)

In fact, depending on how much we have in our SRS accounts, we might even be taxed at a much higher rate. For example, assuming that we amassed $1 million in our SRS accounts, an annual withdrawal of $100K would mean paying $700 in income tax a year.


One way to milk more money from the SRS account is to purchase an annuity which pays us in perpetuity. We would withdraw less money on a per year basis but we would have a guaranteed stream of income as we enjoy our retirement.

Using $1 million balance at age 62 as an example, below is what our annual income from SRS and NTUC Classic Annuity would look like:



*Annuity payout is an estimate based on the guaranteed and non-guaranteed payout.

In this particular case, the taxable income is only $21,510 which means a tax of $30.20 per year after the SRS account has closed at age 72.

That doesn't sound so bad, does it?

Related post:
SRS: A brief analysis.

20 comments:

blanc fable said...

Hi,

The SRS wont be closed unless all are paid out. After 10 years, any amount taken out will be taxed fully. Please correct me if I am wrong

Matthew Seah said...

Hi blanc fable,

Any amount remaining after 10 years will be transferred to your normal bank account and taxed at 50%. The SRS account will then be closed.

Regards,
Matthew

Ashwin said...

Thanks for the post. Individual income tax rates can be increased by the govt and is likely to happen over the 5-10 years as SG increases its social protection programs and the population ages. At this moment there is no guarantee from the govt that SRS funds will be immune to tax rate hikes. SRS makes sense for high income earners, but they would have to factor in some increase in tax rates when they do their planning (like what you did in this post).

-Ashwin

Matthew Seah said...

Hi Ashwin,

I am of the believe that the government is FOR the people. As such the tax rate on the poor would still be low.

Unless our current regime is overthrown, I believe the tax free bracket will remain.

Yes, the SRS do make more sense to high income earners. However middle income earners can also take advantage of the tax relief available.

In the same light, most middle income earners will not require an annuity to reduce the tax rate. The balance at retirement would tend to be lower than 400k.

In my opinion, $1 million is a difficult number to achieve even with max deposit each year unless you start really young, in which case the tax benefit is insignificant for the young adult.

Matthew

Kenneth So said...

Hi AK/Matthew,
From the website, I saw that investment returns are not taxable. Does this mean that if you had contributed 400k, and have 600k of investment returns, that 600k will not be taxed?

Also, does it mean that at age 62, we will have to sell out all the shares that are in the SRS account so that we can close out the account?

Matthew Seah said...

Hi Kenneth,

Investment gains are taxable. That 600k will be taxed.

All SRS withdrawals must be made in cash. So we have to liquidate our investments using SRS monies.

Nick said...

You can start withdrawing you SRS monies over a ten period. The withdrawal clock starts when you make your 1st withdrawal.

Assuming the current tax regime remains, annual assessable income of $20K or less you do not need to pay any tax.

SRS is tax at 50% of annual assessable income, meaning if you are retired and not earning any income at the age of 62 you can withdraw upto $40K assessable income per year you will not be tax. If you take into account the reliefs you could in fact withdraw more than $40K per year.

I believe for the average Singaporean, having a SRS amount of $300K-$400K at the age of 62 is achievable based on compounding.

Matthew Seah said...

Hi Nick,

All your statements are true.

However, do note that several tax relief becomes unavailable at and after retirement age. (e.g. CPF contribution related tax relief)

Regards,
Matthew

Nick said...

Hi Matthew
Thanks for the clarification.

Much appreciated.

Nick

AK71 said...

"... the caps on contributions to the Supplementary Retirement Scheme will also be raised to $15,300 for Singapore citizens and permanent residents and $35,700 for foreigners."

Source: The Straits Times, 23 Feb 15.

K said...

Hi Matthew/AK71,

Your article about using SRS to purchase an annuity to minimize on tax is very interesting. My question is if I want a "simple/straight forward annuity" for my SRS fund, it is more or less the same with any insurance company?

Thanks.

Matthew Seah said...

Hi K,

If you want to use SRS funds to purchase an annuity, make sure the date of payout happens after your last withdrawal.

Alternatively, you could purchase an annuity with all your funds at retirement age and have the payout immediately.

Regards,
Matthew

K said...

Thanks Matthew for the reply.

What is the pro/con of Option 1 vs Option 2?

I need some clarification...

Do you purchase the annuity at age 61 for payout starting from age 72 or do you purchase the annuity at age 71 starting payout at age 72? I would this that the latter gives you more flexibility?

Thanks.

Matthew Seah said...

Hi K,

I believe you misunderstood me.
What I meant was assuming you have $500k at age 62, you could:

#1 Buy annuity with $100k, payout from age 72. Withdraw $40k every year from age 62 to 71.
#2 Buy annuity with $500k, payout from age 62, the following month.

As for your question, the longer the duration from the purchase to the payout date, the higher the payout value.

i.e. Purchasing at 61 has a higher payout starting from age 72 than purchasing at age 72.

Regards,
Matthew

K said...

Hi Matthew,

In this case, I believe Option #1 is better because it provides flexibility for me to access $400k until age 72, in an emergency. In principle Option #2 will give me the same cash flow but I end up locking up the money earlier. Am I making sense?

Thanks.

Matthew Seah said...

Hi K,

Both option will lock up your capital with the insurer the moment you purchase the annuity.
The cashflows are different for option #1 & #2.

Option #1 will give you $40k a year from age 62-71, and a little bit every year from 72 onwards.
Option #2 will probably give you $10-20k a year from 62 onwards.

Regards,
Matthew

K said...

Hi Matthew,

I would like to clarify.

In Option #1, wouldn't it be possible for me to only buy the annuity at 71 for payout from 72 onwards? ie from 62-71 I can choose to withdraw $40k each year or I can withdraw $40k,$40k,$40k,$40k,$40k (from age 62-67) and then $200k at 68 (I will end up paying more tax but maintain flexibility). This is what I meant by access to the $400k in an emergency.

Option #2 is clear.

Thanks.

Matthew Seah said...

Hi K,

You certainly can choose to buy the annuity at 71 and payout from 72 onwards. There are options for immediate payout or a delayed payout for annuities.

Do note that while you have the flexibility to have cash in an emergency, the immediate payout is lower than delayed payout.

Regards,
Matthew

AK71 said...

From my FB wall:

Jieren Azrael Zheng:
"Now no need sell (stocks in SRS account when we start withdrawing our SRS savings at 62 or later) liao, can keep the positions and transfer out, then tax will be based on the worth of those transactions..."

AK71 said...

Getting a private annuity plan to supplement CPF Life once we have the ability to hit the ERS (in CPF-RA) is probably a good solution.

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