Minimising the Costs from SRS and CPF Investments

Thanks to owq's and Uncle CreateWealth8888's comments to my previous blog posts on SRS Exit Strategy and Maximising the Benefits from SRS, I had omitted to mention, for reasons discussed below, the costs of investing through the Supplementary Retirement Scheme (SRS). If you invest in shares and unit trusts, the transaction fees charged by agent banks are $2.50 per 1,000 shares/ units, subject to a maximum of $25 per transaction. In addition, there is a maintenance fee of $2 per counter per quarter. Thus, if you hold a diversified stock portfolio of say, 20 stocks, the costs can add up quickly and reduce the tax savings from SRS. The same fees apply to investments made through the CPF Investment Scheme.

Assuming a 20-stock portfolio, an investor who invests once in each of the stocks would incur transaction fees of $50 and quarterly maintenance fees of $40. Total annual cost inclusive of GST would add up to $224.70. In contrast, an investor whose annual income is $30,000 would only save $200 from contributing to his SRS account. The annual cost would more than offset the tax savings from SRS for this investor.

How would the analysis in SRS Exit Strategy change after adjusting for costs? The results are updated below.

Fig. 1: Change in Portfolio Value Due to SRS Assuming 30-Year Investment

Fig. 2: Change in Portfolio Value Due to SRS Assuming 35-Year Investment

Generally, after accounting for costs, the benefits from SRS reduce for all investors. The largest impact is to investors in lower-income groups, as they derive less tax savings from SRS compared to those in higher-income groups.

Are there any ways to reduce the costs from SRS and CPF investments? If you invest in unit trusts, you can reduce the cost by investing through DollarDex or Fundsupermart. They hold the status of Investment Administrator, which is able to consolidate all transactions made at the same time into a single transaction and make a single withdrawal/ deposit with the SRS/ CPF agent bank. So, regardless of the number of unit trusts you buy, the transaction fee is only $2.50. In addition, the quarterly maintenance fee of $2.00 only applies once per quarter regardless of the number of unit trusts you have in your account. Fundsupermart has a good illustration of how the Investment Administrator works in their Frequently Asked Questions. (Note: Fundsupermart collects platform fees on a quarterly basis, which is on top of the transaction and maintenance fees collected by agent banks).

Thus, although I invest my SRS funds in 2 equity funds on a monthly basis using dollar cost averaging strategy, I am able to reduce the transaction fees by investing the full $12,000 into a money market fund once a year. Every month, I will then manually switch $1,000 from the money market fund into the 2 equity funds. The annual transaction fee is thus only $2.50 + GST. This is cheaper than subscribing to a regular savings plan that automatically withdraws money from the SRS account on a monthly basis and incurring transaction fee each time a withdrawal is made.

For my CPF investment account, I reduce the maintenance fee by holding only 1 stock in the account. Thus, the annual maintenance fee is only $20 + GST. As for transactions, I usually wait until I accumulate a minimum investable amount of $5,000 before making the investment.

It is important to minimise expenses in order to achieve good returns from your investments. By understanding how transaction and maintenance fees from SRS/ CPF agent banks are charged, you can work around them and reduce the costs and maximise your returns from your SRS and/or CPF investments.

See related blog posts:

• SRS Exit Strategy
• Maximising the Benefits from SRS
• Why Unit Trust Expense Ratio Matters