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Retail investors are still warming up to the idea of investing their SRS monies as mirrored by the slow pick-up in the past decade.
More than 25% of all Supplementary Retirement Scheme (SRS) contributions have been left sitting idle in cash by retail investors in Singapore, amid a limited number of products approved for SRS scheme, lengthy approval process and several investment restrictions, reported The Business Times (BT).
SRS is a voluntary scheme that incentivises individuals to save for retirement on top of their Central Provident Fund (CPF) savings while enjoying tax-relief benefits.
As of December 2020, 221,849 individuals have SRS accounts with total contributions amounting to $12.23 billion. Of these, around 26% are held in cash, while only 11% were invested into unit trusts, showed the Ministry of Finance (MOF) data.
Started in 2001, SRS has been enhanced over the years, with the annual contribution cap for Singapore citizens and permanent residents increased to $15,300 and $35,700 for foreigners.
Contributions to the scheme are eligible for tax relief. Investment returns are also tax-free prior to withdrawal, with only 50% of the SRS withdrawals taxable at retirement.
“SRS funds can mainly be used to invest in stocks, ETFs, REITs, bonds, unit trusts, retirement-related insurance products and fixed deposit schemes through any of the three SRS operators: DBS, OCBC or UOB,” said BT.
SRS monies may only be invested in domestic instruments, or on Singapore dollar-denominated investments only – narrowing the option of investors, said Nikko Asset Management Joint Global Head of ETF business Phillip Yeo.
As such, SRS monies cannot be invested if “an ETF is traded in US dollars on the Singapore bourse, or if a Singapore-registered unit trust only has share classes denominated in Chinese yuan”.
And although the process of having funds approved for SRS investing is not “difficult or onerous”, it could be resource-intensive and time-consuming as fund management companies (FMCs) have to secure approval for each individual share class of funds, said robo-adviser Endowus Chief Investment Officer Samuel Rhee.
“FMCs have to balance between the additional resources needed to make funds available for SRS against the benefit of gathering more assets through SRS,” he told BT.
Investment platforms and new distributors also have difficulties getting approval for their products due to the complexity of their offerings as well as their custodian arrangement.
StashAway chief Michele Ferrario believes the main hurdle arises from setting up operational processes with SRS operators.
“In practice, this means aligning with DBS, OCBC and UOB on the flow of funds and required information between all parties,” he said as quoted by BT.
Meanwhile, a MOF spokesperson described the offering of products under the respective SRS operators as a “commercial decision”, adding that the government does not keep a list of approved products nor oversee the approval process.
Checks by BT, however, showed that the “lack of incentive to roll out more SRS investment products in Singapore cannot be pinned entirely on industry bottlenecks”.
Retail investors are still warming up to the idea of investing their SRS monies as mirrored by the slow pick-up in the past decade.
Notably, total SRS contributions that are sitting in cash stand at between 30% and 35% from December 2011 to 2018, before dropping to 28% in 2019 and eventually to 26% in 2020, showed MOF data.
Less than 2% of Franklin Templeton’s total retail assets under management (AUM) come from SRS monies. The company offers 31 SRS-approved funds.
“This can be attributed to the fact that generally, the typical SRS investor would be in the higher income bracket with excess cash to be parked away for the long term,” said Clement Lee, Singapore Head of Retail at Franklin Templeton, as quoted by BT.
Singapore citizens and permanent residents have to wait until they are 62 years old before they can withdraw their SRS funds without penalty.
“Given the penalties that come with an early withdrawal, make sure you’re confident that you have enough liquidity elsewhere that you won’t need to tap into this account early,” said StashAway’s Ferrario.
Nikko AM’s Yeo said some SRS contributors do not wish to risk their savings and are content with the tax relief.
Others may have no time to deploy their funds or are unsure of what investments are suitable. It may also be their intent to leave some of their SRS in cash, reserving it for some “compelling opportunity”, he added.
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Victor Kang, Digital Content Specialist at PropertyGuru, edited this story. To contact him about this story, email: victorkang@propertyguru.com.sg