Wednesday, 8 November 2017

Supplementary Retirement Scheme (SRS): My Portfolio Construct Thoughts

As we head into the last quarter of the year, articles regarding Supplementary Retirement Scheme (SRS) are being published through traditional media outlets to educate members of the public what the scheme does or to remind existing holders that it's time to top up the account to qualify for tax relief in 2017.

This helpful article by Lorna Tan, Investment Editor from Straits Times should provide you with the necessary insights of the benefit provided by SRS, mainly:
  1. Every dollar deposited into your SRS account reduces your taxable income by a dollar. 
Who will likely benefit from utilising the SRS account?
  1. Essentially, if you are required to pay tax this year and you do not foresee much difference to your income earned for the next year, opening up an SRS account will help to offset your tax expenditure, saving you potentially hundreds of dollars. 
  2. As this is meant for retirement purposes, I do recommend only using disposable income for SRS as it is only non taxable before withdrawal. The mechanics of withdrawals are listed in the article as well. 
Utilising the SRS for tax relief is step 1. Putting the funds inside your SRS account to work harder tso as to generate healthy returns is step 2.

I opened my SRS account in January this year. Bad move. Due to the difference of a few days, I missed out on the opening account specials as well as the tax reliefs for last year's tax. I've made this mistake and I hope you do not procrastinate as much as I did.
I treat CPF as enforced savings and SRS to me is an invitation to invest. 
I focused on 2 aspects when deciding where to channel the funds in my SRS account to. 

  1. Capital preservation 
  2. Income generation 
There are various instruments that are applicable for SRS but I'm going to stick to what I'm more familiar with: Stocks. I have every intention to keep the money untouched all the way till retirement age, hence I'm taking a risk averse approach for this account. And to counter against inflation, I'll be focusing only on stocks that have a track record of paying dividends even during market downturns. 

Importantly, do note that there is a current maximum cap of $15,300 that you can put into the SRS in a calendar year. Hence, if you were to invest in a stock that frequently have rights issues, it is likely that you will not be able to participate in the rights issue and will have to bear with dilution of your shares. For me, I'll choose stocks that do not have the track record of issuing rights issue.

Earlier this year in January, I put in the maximum of $15,300 and used it to purchased 5,000 shares of STI ETF at $3.02.

  • Index ETF does not have rights issue
  • STI ETF has less risk as it is spread over 30 of the strongest stocks that forms the index. Stocks with weak performances are removed from the index and replaced with better stocks periodically during reviews, thereby ensuring the quality of the constituents. 
  • Dividends received this year: $0.101 per share (roughly 3.3% on cost)

My original intention was to treat the SRS as a form of dollar cost averaging and simply buy as many units of STI ETF on a yearly basis. The decision was easy considering that it was made when STI ETF traded at $3.02. When it’s at $3.45 (today's closing price), its a much harder call to make. 

I have the intention of turning my SRS portfolio into an ETF portfolio. Am considering another couple of ETFs at the moment and only time will tell which one will I sink next year's allocation in!

As I can only top up my SRS earliest in January, this leaves me with some time to dod more research and make up my mind. Will update my decision when I eventually make my move.

Do you have any plans to invest your SRS funds? Will appreciate any contributions and perhaps help me make a more informed decision!  

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