How to use your SRS for insurance
As we head into year-end, it is a good time to review your Supplementary Retirement Scheme (SRS) monies. That’s because SRS offers opportunities to build up your retirement nest egg with tax benefits – a chance to reduce tax burden for the current tax year if you act before the end of the year.
But that is possible only if you invest the funds you contribute to SRS. Otherwise, the funds sit there earning next to nothing.
How does SRS help you build your nest egg?
SRS contributions come with tax reliefs
Contributions to SRS are eligible for tax relief subject to a maximum of $80,000 for all tax reliefs claimed. The limit on contributions is S$15,300 for Singaporeans and Permanent Residents and S$35,700 for foreigners.
Withdrawals after the legal retirement age (currently 62) enjoy a 50% tax concession. This means that only 50% of the withdrawals are taxable. But if you make a withdrawal before you turn 62, that is taxable in full and subject to a 5% penalty.
No tax on investment capital gains
Your SRS monies can be used to purchase or invest in a range of financial products, including:
Any gains you make on your SRS Investments will automatically be deposited into your SRS account. These gains are exempt from tax until you decide to withdraw the money.
What are your options if you prefer insurance products?
In discussions of SRS and its investment options, insurance solutions are sometimes overlooked. So, we have summarised the key facts and solutions for you to make an informed decision, if you are looking into insurance products for your SRS monies.
(If your focus is investment products, this article provides more details.)
Main facts to know
- You can buy single premium insurance products with SRS
A typical example of such a single premium product is one where you pay a one-time premium, which then gathers value over time to give you a lump sum payout at maturity or a stream of income in the future, starting from a date of your choice.
- A portion of investment returns is guaranteed
Insurance products provide a unique proposition: a portion of investment returns is guaranteed, thus making them a good fit for those who prefer more conservative and steady returns.
- The life cover is capped at 3x of the single premium
Upon death or terminal illness, SRS allows withdrawal at full tax exemption up to S$400,000.
How much single premium insurance should you get?
Firstly, you set your goals:
- When do you wish to retire?
- How much “guaranteed monthly income” do you want per month?
- And over what period of time do you want that income to run?
That will determine how much you will have to pay in the single premium to achieve your goals. In return, this is what you receive:
- Future “guaranteed monthly income” streams that are guaranteed by the insurance company (not the distributor)
- In such products, there is also the possibility of additional non-guaranteed bonuses where the insurance company is doing well financially.
There are many different single premium insurance products
Within the single premium insurance space, there is a range of product options. To give you a flavour of the variety, here are some that DBS Bank offers.
SavvyEndowment 2 is a short 2-year endowment policy that provides returns of up to 2.101% per annum. This is up to 104.22% of the single premium amount you paid. For risk averse individuals in this yield hungry world, this is a decent return, compared to close to 0% if your SRS funds are left idle. SavvyEndowment can be purchased online.
Manulife Goal 4 is also a short 4-year endowment policy that returns the single premium if it is held to maturity, and a fixed yearly income of 1.80% of the single premium for the first three policy years. This adds up to a total of 5.40% over 3 years. Policyholders have the flexibility to withdraw the fixed yearly income or accumulate3 them at a non-guaranteed interest rate. Manulife Goal 4 can be bought at any DBS / POSB branch with no health check-ups needed, & guaranteed acceptance.
RetireReady Plus & ReadyBuilder are policies that allow you to tailor your single premium payment according to your retirement needs:
- Your choice of retirement age;
- The amount of guaranteed monthly income or lump sum you wish to receive or withdraw upon retirement; and
- The corresponding income pay-out period (where applicable).
All of this will determine how much you need to pay as a single premium. You can find out more about these by making an appointment here, or by visiting any DBS/POSB branch.
1 The potential maturity bonus of 3.24% of the single premium is based on the higher illustrated investment rate of return of 2.11% p.a. Based on the lower illustrated investment rate of return of 0.80% p.a., the potential maturity bonus will be zero. The bonus rate and the illustrated investment rate of return are not guaranteed and will depend on the future performance of the Participating Fund of the policy.
2 This figure is rounded down to 1 decimal place.
3 For both Cash and Supplementary Retirement Scheme (SRS), the policy owner can choose to either (1) fully or (2) partially withdraw the accumulated fixed yearly income plus interest (if any) by submitting a withdrawal form to Manulife. The minimum withdrawal amount is S$500 or the balance available. For policies purchased using SRS, full or partial withdrawal of the accumulated fixed yearly income plus interest (if any) will be paid directly to the SRS account as per prevailing SRS guidelines.