So you’ve already contributed to your SRS account.
But you know that only solves half of the problem – reducing taxes.
The other half of the problem is that the balance in your SRS account is only only earning 0.05% interest/year for the many years to come.
And inflation will negate any benefits you get from contributing.
There’s a variety of investment options for SRS funds out there but you’ve narrowed your search down to the SRS annuity plan.
In this guide, you’ll learn all about endowment plans using SRS funds.
So, let’s get on with it!
Note: To describe the SRS endowment, I’ll also be using the terms annuity, retirement plan, insurance product interchangeably. You’ll see why.
- SRS Insurance Products are Protected
- What Type of Insurance Products Can You Buy with SRS?
- Only One Choice: The Single Premium SRS Annuity Plan
- How Does A SRS Annuity Work?
- The Returns On A SRS Retirement Plan
- Are The Returns Subjected To Income Tax?
- The 7 Moving Parts of a SRS Annuity Plan
- 1) Insurance Coverage
- 2) Capital Guaranteed
- 3) Guaranteed Retirement Income
- 4) Non-Guaranteed Retirement Income
- 5) Selected Retirement Age
- 6) Income Payout Period
- 7) Other Additional Benefits
- The 2 Main Disadvantages of Plans Purchased with SRS
- Pros and Cons
- The Best SRS Endowment (Annuity) Plan?
SRS Insurance Products are Protected
Policies have an extra layer of protection.
Insurance products bought with SRS (or with cash) are usually protected by the Policy Owners’ Protection Scheme which is administered by the Singapore Deposit Insurance Corporation (SDIC).
In the event that a life insurer were to fail, MAS’s preferred course of action is to transfer the insurance business of the failed insurer to another.
That’s layer one.
And if the business cannot be transferred?
SDIC may take over and cover existing policies (up to caps).
MAS’s final course of action is to ensure policy owners are not heavily impacted.
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What Type of Insurance Products Can You Buy with SRS?
There’s a wide array of insurance plans you can purchase with cash.
Can you do the same with SRS?
Unfortunately, you can’t just buy any insurance you like.
There are limitations.
Taken directly from the Ministry of Finance, here are the following conditions for any insurance products purchased with SRS:
- Only single premium products are allowed (including recurrent single premium products, encompassing both annuity and non-annuity plans).
- Life cover (including total and permanent disability benefits) will be capped at 3 times the single premium.
- Plans can allow for a contribution continuation feature/benefit upon disability.
- Other types of life insurance e.g. critical illness, health and long-term care are excluded.
- Trust nomination is not allowed for life insurance products purchased using SRS funds.
The Government currently does not maintain a list of approved or eligible SRS insurance products.
So if you’re asking what type of insurance you can buy with SRS?
There’s really only one option …
(and which is why I said the SRS endowment/annuity/retirement plan/insurance can be used interchangeably)
Only One Choice: The Single Premium SRS Annuity Plan
First off, your SRS monies are meant for retirement. It’s not called the Supplementary Retirement Scheme for nothing.
It’s meant for your own consumption and not meant to be left for your family (which is why you can’t make a nomination).
Extra fact: If death happens, the SRS balances form part of your estate and will be distributed according to the will or law (if there’s no will).
So because of the above conditions, insurance companies can only design a product that have a very low (or negligible) insurance coverage but geared towards higher retirement income payouts.
It makes sense.
You’re usually only concerned with the returns on your SRS investment.
How Does A SRS Annuity Work?
You’ll need to allocate a single premium lump sum for the annuity plan.
Then just wait till your selected retirement age and start receiving a monthly or yearly retirement income.
This income consists of a guaranteed and a non-guaranteed income.
And you’ll receive this income for fixed number of years (income payout period).
The above is just a general overview of how it works. I’ll touch more on the specifics later in this article.
The Returns On A SRS Retirement Plan
The plans are usually capital guaranteed upon maturity.
Meaning, you won’t lose your principal as long as you hold it for the entire period.
But what’s more important are the returns you can get from the plan.
With the combination of guaranteed and non-guaranteed income, an annuity plan tries to achieve potential returns of around 3-4% per year.
The expected returns will vary according to different factors like length of accumulation period, income payout period, etc.
To better give a gauge, let’s look at Manulife RetireReady Plus (SRS):
Profile of John
- 40 Years Old
- Selects a Retirement Age of 65
- Wants to receive 10 years of income from 65 to 75
- Plans to set aside $98,355.25 from his SRS account
From 65 to 75, he’s able to receive a total guaranteed income of $186,000 (1550*12*10).
This is almost double of what he has put in.
At the same time, he’s also entitled to receive a total non-guaranteed income (illustrated investment return at 4.75%) of $141,619 (1180.16*12*10).
This puts the total illustrated return to be at $327,619 (186,000 + 141,619).
But he only needed to put in $98,355.25 at the start.
Here’s a summary from the policy illustration:
You can see that the guaranteed yield at maturity to be at 2.15% and the total illustrated yield at maturity to be at 4.10%.
Terms and Conditions apply.
Are The Returns Subjected To Income Tax?
In case you don’t already know, all payouts from the annuity plan (or from any other investments made using SRS) go back into the SRS account. And from there, you’ll have to withdraw it out.
If you’ve read my other guide on what is SRS all about, you’ll know that investment returns from your SRS investments (including the endowment plan) are tax-free.
Withdrawal amounts are still taxable.
The best period is withdraw is after the prescribed retirement age (currently at 62) as there will be no penalties and only 50% of the withdrawn amount is taxable.
I’ve explained this in detail in that guide, but to put it simply, you need not pay any taxes on withdrawals up to $40,000/year (assuming no other income and for the 10-year period).
That’s why it’s much better to spread your withdrawals rather than withdrawing it one shot…
Which explains the usefulness of an annuity.
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The 7 Moving Parts of a SRS Annuity Plan
These are several factors to consider in an annuity.
1) Insurance Coverage
Like mentioned earlier, insurance coverage should not be a priority as the priority should be on the returns you’ll receive.
So you won’t see high insurance cover in any of these plans.
An example of the death benefit: 105% of all premiums paid + any bonuses declared.
Therefore, policies like these have guaranteed issuance.
No matter what kind of health conditions you have – minor or major – it doesn’t matter.
You can still apply and it’ll go through as there is no medical underwriting.
2) Capital Guaranteed
Back in the day, endowment plans may not be capital guaranteed.
So technically, in the event that an issuer does not declare any bonuses every year, the amount you get back may be lower than the amount you’ve put in.
However these days, most plans are capital guaranteed upon maturity.
So long as you hold it for the period that’s intended, you need not worry.
3) Guaranteed Retirement Income
I see this as the most important aspect of an annuity plan.
Being able to know how much you’re going to receive many years down the road is important for any form of retirement planning.
If not, everything will be a guesstimate.
It’ll be hard to plan for your retirement if everything is uncertain (or not guaranteed).
4) Non-Guaranteed Retirement Income
All non-guaranteed income would be seen as a bonus on top of the guaranteed income.
If you’ve bought an endowment or savings plan before, you’ll know that the guaranteed portion is not all there is to it as non-guaranteed bonuses play a part too.
Insurance companies do strive to declare bonuses in line with what’s illustrated.
However, the fact is this: wordings are still black and white.
Non-guaranteed is still non-guaranteed.
Which is why I still place a higher emphasis on the guaranteed portion.
5) Selected Retirement Age
For an endowment plan bought with SRS funds, you would want the selected retirement age to be at least after 62 years old.
Why? Because there won’t be any 5% withdrawal penalty and only 50% of the withdrawn amount is taxable.
Not all SRS endowment plans have the option to start income payouts at 62/63.
But most have the option to start at 65 (which I feel is the most optimal age).
6) Income Payout Period
There are several options here.
The payouts can be for 10, 15, 20 years, or for lifetime, starting from the retirement age.
Generally, a longer income payout period translates to a lower income, with all things the same.
So the question is whether you want to have a long payout period?
For me I would prefer a 10 years income payout starting from 65 to 75 because that would be the prime period.
Beyond that, I may not need that much anyway (or probably can’t even enjoy it).
7) Other Additional Benefits
Most plans are plain-vanilla.
They just have the above-mentioned moving parts so you rarely see any other additional benefits.
One exception is with Manulife which have 2 secondary benefits.
First is that if a severe disability happens during the income payout period, you’re entitled to receive an additional payout.
Second is that you can change the income payout period 2 years before your selected retirement age.
The 2 Main Disadvantages of Plans Purchased with SRS
1) Opportunity Costs
First off, if your risk tolerance is low, you’re wouldn’t be comfortable with volatile investments.
But if your risk appetite is higher, and for example you gave up ETFs and opt for the endowment…
If in the future, the ETF performs well, it can be an opportunity cost to you.
(But take note that the opposite can be true as well)
2) Locked In Periods
Secondly, annuity plans have locked in periods.
If you intend to surrender at any time before the maturity, it’s usually detrimental.
Your surrender value might be lower than the amount you’ve put in.
But in return, if you maintain for the whole period, then you’re entitled for the benefits outlined in the plan.
Pros and Cons
- Capital guaranteed upon maturity
- Have a decent guaranteed yield at maturity
- Participates in non-guaranteed bonuses
- Able to set it and leave it – thus giving you time to concentrate on the more important things in life
- Policies are further protected by the Policy Owners’ Protection Scheme
- Opportunity costs if alternate investments perform exceedingly well
- Early surrender usually translates to surrender value being lesser than the amount put in
The Best SRS Endowment (Annuity) Plan?
Different insurance companies may have different features/benefits and some may have limitations to what you want.
But the important question is how much can you get back?
So then, the best option for you is to have a comparison of the different annuity plans along with actual quotes and figures.
Take the first step and compare SRS endowment plans now.