SRS analysis
I haven’t paid much attention to SRS contributions as a way to reduce taxable income. But lately, I realised you could boost investment portfolio returns through this avenue at literally 0 cost.
I find this blog post written by a local finance blogger to be really helpful in understanding the SRS contributions and withdrawal mechanics.
For my own understanding, I also did some quick analysis using google sheet (see ‘Analysis in google sheet’ section) to evaluate if this works, and to my surprise, I found that free lunch does exist in Singapore!
Assumptions
In my analysis, I assume 7% marginal tax rate because that’s the lower bound when contributing to SRS starts to make sense - accounting for the 5% penalty for early withdrawal.
For robustness, I did scenario analysis across 1-10% myriad of possible invesment returns.
For this example, I extended the cashflow only till the 10th year.
Maximum allowable contribution of $15.3k/ year is used here.
Quick summary of analysis
I wouldn’t bore you with the mechanics as the steps could be found in the google sheet but I will do a quick summary of my findings.
- Comparing Row C and G: Over a 10 year period - assuming you invest out of SRS regime (Row G) over within SRS regime (Row C) - you enjoy an additional terminal value of $11k - 15k.
- Comparing Row D and G: Assuming a 5% early withdrawal penalty (broad stroke here because taxable income in year and amount you withdraw matters), you enjoy an additional terminal value of $3.2k - 4.4k.
- Comparing Row E and B: Investment returns wise, if you ignore early withdrawal penalty, you would enjoy additional returns of 1.5 - 1.6%.
- Comparing Row F and B: Accouting for withdrawal penalty, you would enjoy additional returns of 0.4 - 0.5%.
Caveat
- You do lose some flexibility by contributing towards SRS because you aren’t able to liquidate entire SRS at a low cost. Because taxable income in year of withdrawal and amount you withdraw matter!
- Investment returns could be further boosted if you withdraw at age 62 because only 50% of SRS is taxed at the prevailing retirement age when you opened your SRS account (currently at 62).
- Works better for non property players with 0 rental income.