It is coming to end of the year. Those who wish to save on taxes are now thinking of tax saving measures such as Supplementary Retirement Scheme or better known as SRS. By default, SRS contributions remain as cash. In fact, the majority of SRS monies are sitting idling as cash. If you wish to make the money work harder, it is necessary to invest the money. This article explains three ways on how to make your SRS work harder.
For the Conservative Investor
For those who are conservative in risk profile and has no wish to subject their money to potential losses, they can consider the following:
Recurring single premium endowments. These are single premium endowments but recurring in nature. Every year, the insurer will automatically deduct a fixed amount from your SRS account to purchase a single premium endowment. The endowments will mature at a specified date during retirement.
Life-long annuities. Upon a single premium purchase, the insurer will pay the agreed amount every month or every year starting from the retirement age for the rest of the individual’s life. For example, I have an actual client who is 62 years old and purchased a $500,000 single premium annuity from me. He gets a guaranteed payout of $1,841 a month for the rest of his life starting one month later. If the payout is annual, the amount of payout is $23,012.50. Hence, the payout-to-single premium ratio is 23012.50/500000 = 4.6%. In terms of tax treatment, half of the annuity payout is taxable. For this example, 23012.50/2 = $11506.25 will be considered as personal income. Currently, no tax is payable for such an income. It must be noted that commission for such a life-long annuity is 80% lower compared to other similar products and hence it is practically not available for consumers to purchase it.
Anticipated endowment. In recent years, there have been a number of insurers offering anticipated endowment designed to payout during one’s retirement years. For example, another individual bought a $500,000 single premium anticipated endowment from me recently. He is 57 years old. At 65 years old, an annual guaranteed payout of $23,988 increasing at a guaranteed rate of 3.5% per annum over 20 years will be paid. There is a non-guaranteed maturity value at the end of 20 years. As the payout period exceed the 10 years withdrawal requirement imposed on SRS account and at the fact that this is strictly not classified as life-long annuity, the tax treatment is unknown.
For moderately aggressive investor
Unit trusts is the recommended instrument to use for moderately aggressive. The advantages of unit trusts are:
- Diversified in nature as a single fund is invested into hundreds of stocks and bonds.
- The ability to construct a portfolio with just a small capital.
- There are countless choices of unit trusts to choose from and
- The ability to invests in foreign securities.
The disadvantage of unit trust is that monitoring is required as unit trusts tend to underperform for a very long period once it starts to underperform. Another disadvantage is its relatively high cost compared to Exchange Traded Funds. Unfortunately, investing using ETF via SRS is not viable because of Singapore’s dismay ETF market. STI ETF is one of the worst ETF to invest in because it is a poorly diversified ETF. Nearly half of the STI ETF holdings is invested in DBS, OCBC, SingTel and UOB. It will be more sensible to just buy these 4 stocks directly. As for other ETFs listed on SGX, it is like a ghost town in which there is barely any liquidity.
One way to overcome the limitations of unit trusts is to consider a unit trusts managed account. A unit trusts managed account is likely able to implement most of the methods to increase the expected return as mentioned in this article: 6 ways to increase your investment returns.
For Aggressive SRS Investors
For such a group of investor, the SRS may be invested in stocks. It appears that OCBC, UOB and DBS only allows Singapore listed stocks although I do not know of any regulation prohibiting investment in overseas stocks.
As the SRS operator is the custody of these stocks, corporation action has to be done via the SRS operator.
For those who wish to use their SRS to invest in overseas stocks would either have to use unit trusts or use discretionary managed accounts.
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