How to optimise your SRS withdrawals?

SRS is a tax deferral plan that not only helps you to lower your taxable income, but also helps you build a retirement fund.


To make the most of your SRS account, you need to plan your contributions carefully and look for the right investment instruments. This will help maximize your tax savings and ensure that your SRS monies work hard to bring you returns.


It is important to have a good withdrawal strategy. Efficiently drawing down your SRS account will help you avoid taxation during your retirement, and ensure you hold onto more of your hard-earned money.


Keeping that in mind, we have highlighted some of the important aspects related to your SRS withdrawals – it is everything you need to know to successfully hatch the golden egg you have patiently nested.


In this article, you will learn about:


  • Why it is important to make withdrawals only after your retirement?
  • How to save on tax through staggered withdrawals?
  • How to use annuity/insurance to maximise your savings?

Why is it important to make withdrawals only after your retirement?

You can make withdrawals from your SRS account at any time you like. However, withdrawals made before the statutory retirement age will be subjected to a 5% penalty, and 100% taxable. The only time pre-retirement withdrawals are penalty-free is under certain conditions, such as illness, bankruptcy, or death.


On the other hand, any withdrawals made on, or after the retirement age are completely penalty-free. On top of that, there is also a benefit for withdrawals made on, or after the retirement age - 50% of your annual withdrawal amount will be exempted from taxation.


How to save on tax through staggered withdrawals? :

The SRS has a maximum withdrawal period of 10 years. This window begins on the day you make your first post-retirement withdrawal and ends 10 years later. Once the 10-year withdrawal period comes to an end, the balance in your account (except life annuities) needs to be withdrawn immediately and 50% of this amount will be exempt from taxation.


You can withdraw your SRS monies in two ways:


1. Withdraw everything at one go

2. Or, spread your withdrawals over 10 years.


To lower your tax bill, you can consider stretching your SRS withdrawals over this 10-year period instead of a one-time withdrawal. The next 3 scenarios will explain why and how:


Scenario 1: You have $400,000 in your SRS account and withdraw the entire amount after 62 years of age. In this scenario, the first 50% ($200,000) will be exempted from taxation. However, the next $200,000 will be taxed as per the personal income tax rates. This will result in a tax bill of $21,150 for the year, as per the applicable tax rate (19%).


Year

Opening Balance

Withdrawal Amount

Tax Free Amount

Taxable Amount

Closing Balance

Tax Payable

1

$400,000

$400,000

$200,000

$200,000

$0

$21,150


Scenario 2: You have $400,000 in your SRS account and choose to spread your withdrawals over 10 years. You withdraw $40,000 per year for 10 years; the first 50% of each withdrawal ($20,000) would be exempted from taxation. Since the next $20,000 falls below the taxable bracket, you will only be required to pay $0 in taxes for the year. The assumption here is that you do not have any other source of income at the time of withdrawal.


Year

Opening Balance

Withdrawal Amount

Tax Free Amount

Taxable Amount

Closing Balance

Tax Payable

1

$400,000

$40,000

$20,000

$20,000

$360,000

$0

2

$360,000

$40,000

$20,000

$20,000

$320,000

$0

3

$320,000

$40,000

$20,000

$20,000

$280,000

$0

4

$280,000

$40,000

$20,000

$20,000

$240,000

$0

5

$240,000

$40,000

$20,000

$20,000

$200,000

$0

6

$200,000

$40,000

$20,000

$20,000

$160,000

$0

7

$160,000

$40,000

$20,000

$20,000

$120,000

$0

8

$120,000

$40,000

$20,000

$20,000

$80,000

$0

9

$80,000

$40,000

$20,000

$20,000

$40,0000

$0

10

$40,0000

$40,000

$20,000

$20,000

$0

$0


Scenario 3:You have $500,000 in your SRS account. In this case, you could spread your withdrawals over 11 years. In the first 10 years, you could make annual withdrawals of $45,455. This will leave you with a closing balance of $45,450 which you can withdraw in the 11th year. In effect, every one of your 11 withdrawals will be exempted from 50% tax and you would end-up with a tax bill of just $599.90. You can find the exact break-up in the table below.


Year

Opening Balance

Withdrawal Amount

Tax Free Amount

Taxable Amount

Closing Balance

Tax Payable

1

$500,000

$45,455

$22,727

$22,727

$454,545

54.54

2

$454,545

$45,455

$22,727

$22,727

$409,090

54.54

3

$409,090

$45,455

$22,727

$22,727

$363,635

54.54

4

$363,635

$45,455

$22,727

$22,727

$318,180

54.54

5

$318,180

$45,455

$22,727

$22,727

$272,725

54.54

6

$272,725

$45,455

$22,727

$22,727

$227,270

54.54

7

$227,270

$45,455

$22,727

$22,727

$181,815

54.54

8

$181,815

$45,455

$22,727

$22,727

$136,360

54.54

9

$136,360

$45,455

$22,727

$22,727

$90,905

54.54

10

$90,905

$45,455

$22,727

$22,727

45,450

54.54

11

45,450

$45,450

$22,725

$22,725

$0

54.50


How to use annuity/insurance to maximise your savings?

You could consider maximising your savings when you invest part of your SRS funds into life annuities. This is because the maximum withdrawal period of 10 years. These plans have the potential to grow your money and provide you a steady flow of income during your golden years. The best part is that 50% your annuity stream will continue to be exempted from taxation.


Let’s see how this works:


At the age of 62, John had $500,000 in his SRS account. He decided to invest $100,000 into a single premium payment endowment policy. John opts to start receiving pay-outs at age 72. This ensures that, even after he has fully drawn down on his SRS account, he will still receive a guaranteed monthly income flow from his endowment policy. And as mentioned earlier, 50% of these payouts will be tax-free!


Need help planning for your retirement?

Consult a Prudential Financial Consultant today! Our consultants will help you to analyse your financial health and guide you on how you can optimise your SRS savings to achieve a secure retirement!


Disclaimer:

This article is for your information only and does not consider your specific investment objectives, financial situation or needs. We recommend that you seek advice from a Prudential Financial Consultant before making a commitment to purchase a policy.