What can you do with your Budget Windfall?

Feb 24, 2008

What you can do with your Budget windfall

Singapore's latest Budget came stuffed with something for the man in the street. Lorna Tan looks at how some of the Budget handouts will help improve the personal finances of individuals

GIFTS of cash, top-ups to Medisave, personal income tax rebates...the list goes on and on.
This year's Budget provided a slew of goodies for all Singaporeans, thanks to a bumper Budget surplus of $6.45 billion from last year, made possible by the property market boom and the robust economy.

Let's take a closer look at some of these handouts.

Personal income tax rebate

THIS one-off windfall comes in the form of a 20 per cent rebate capped at $2,000. There is a cap because the rebate is targeted at middle-income taxpayers rather than high earners.

Regional sales manager Steven Lum, 50 - who earns an annual salary of $155,000 and claims relief for his unemployed wife and two children - can expect to reap the maximum $2,000 rebate.

Mr Lum said he will use a portion to offset higher living expenses, but he plans to gradually put the bulk of his rebate savings in his investment portfolio of unit trusts as the markets are still volatile.

Ms Yashodhara Mishra, a senior vice-president at ipac financial planning, said: 'People should invest this one-off 'gift' long term so they can enjoy the benefits of compound interest.

'All short-term incentives are meant to stress the crucial need for long-term financial planning in ensuring the longevity of one's capital.'

Mr Leong Sze Hian, the president of the Society of Financial Service Professionals, worked out that if $2,000 is compounded annually at 6 per cent, it will double to $4,000 in 12 years. In 30 years, it will reach $11,487.

Supplementary Retirement Scheme

STARTED in 2001, the Supplementary Retirement Scheme (SRS) offers tax incentives to Singaporeans and foreigners to encourage them to save for retirement outside the Central
Provident Fund (CPF) scheme.

Before, only employees could contribute to the SRS.

It was announced during the Budget that employers will also be able to contribute, on behalf of their employees, up to the current cap of $11,475.

Mr Ben Fok, the chief executive of Grandtag Financial Consultancy (Singapore), said employers can take advantage of this change to retain talent.

'Companies can show their concern for their employees by helping them to grow their retirement funds,' he said.

For employees, one advantage of the scheme is that it is portable because the SRS, unlike other pension plans, is not tied to their employment.

Furthermore, there are tax reliefs for both employer and employee contributions, which should help employees to lower their tax payable and grow their nest eggs, said Mr Fok.

Ms Mishra noted that, as the age limit on the scheme will be lifted, CPF members above 62 will be able to contribute to the SRS and enjoy tax deductions.

CPF-related top-ups

For Medisave

Singaporeans aged 51 and older will get top-ups of $150 to $450 in their Medisave Accounts, depending on their age.

Mr Leong noted that, though the top-ups are a welcome bonus, they might not be enough to offset rising MediShield premiums and medical costs.

For those below 55 whose Medisave Accounts have already reached the maximum level of $33,500, the top-ups will go into their Special Accounts. Mr Leong says this sum can be put into a globally diversified portfolio of investment funds, with a 60:40 split for equities and bonds.

For Minimum Sum

You can now enjoy up to $7,000 in tax reliefs when you top up your own CPF Minimum Sum, or those of your family members. Previously, you could get the tax relief only if your family member was 55 or older.

The reliefs can be used to reduce tax liabilities, said Mr Leong.

Removal of estate duty

THIS tax - previously levied on the estate of anyone who died with assets that exceeded certain thresholds - has been abolished, effective Feb 15.

It was levied at a rate of 5 per cent on the first $12 million of applicable assets and 10 per cent on higher levels. Movable assets of $1 million, for example, were liable for $50,000 in tax.

The key grouse was the lopsidedness of the exemption limits. You could own up to $9 million in residential property and not be subject to estate duty.

The exemptions were less generous for other assets.

If someone left behind more than $600,000 in cash, shares and other assets, any sum above that would be taxed.

Given rising affluence, more middle-income Singaporeans were falling into this bracket.
Here are some benefits that come with the abolition.

Reduced probate time

Beneficiaries no longer need to scramble to prepare and file estate duty returns.

This is one less source of stress during a time of bereavement, said Mr Ooi Boon Jin, the executive director of KPMG Tax Services.

Without the abolition, the return had to be filed and the tax paid before the grant of probate could be obtained and the estate released for distribution.

This created cash-flow problems for some families who might have needed to sell the assets in the estate just to pay the tax.

When contacted, the Inland Revenue Authority of Singapore confirmed that it will no longer require that notices be filed or that estates be valued for those who died on or after Feb 15.

According to Ms Ang Kim Lan, a director at Goodwins Law Corporation, it took six to nine months for the executor of even a simple estate - comprising, for instance, an HDB flat and a bank account - to obtain a grant of probate.

For complex cases with overseas assets, it could take a few years, and the process could be delayed even further because of the time needed to gather evidence and evaluate all the assets.

With reduced probate times, beneficiaries can also expedite the collection of death payouts from insurers and the sale of assets such as property, said Mr Patrick Lim, the associate director of financial advisory firm PromiseLand.

Another benefit is that legal and court fees, which typically start from about $4,000, might be revised downwards now with the shortened process.

Ms Lie Chin Chin, the managing director of law firm Characterist, added that, in cases where the assets are under joint names but the details tally with the arrangements made in the will, it might not even be necessary to go to court to obtain the probate.

Elimination of certain devices

In order to pare down the amount of estate duty payable upon death, many Singaporeans had relied on a variety of devices in the past.

These included buying insurance policies so the payouts could be used to offset the estimated tax payable, and setting up trusts and marriage gifts for children.

Now, some of these devices might well be redundant.

However, besides being exempt from estate duty, insurance policies and trusts also help protect your assets from creditors.

These and other factors should be considered before you make any decision to terminate them.

Insurance plans

For those who bought term plans to help their family members pay for the estimated estate duty, this is a good time to review their financial portfolios, said IPP Financial Advisers investment director Albert Lam.

In some cases, the individual might still want to hang on to the policy.

For example, if his health has since undergone some impairment that means he would not qualify for a new life insurance policy, the term plan that he had bought to deal with estate duty could come in useful by providing additional protection, said Mr Lam.

If the individual can afford to continue with the premium payments, he might be better off continuing with the cover.

Trusts

The same applies to those who set up trusts solely for the purpose of minimising estate duty. This is a legal arrangement that allows you to give away your assets, such as shares and
property, to named beneficiaries.

Early gifts

In the past, some wealthy folks made marriage gifts - in cash or in kind - to their children or immediate family members who were getting married, so they would be exempt from estate duty. Legal documentation was needed to cover the gifts and the transfer had to be made less than a year before or after the marriage was solemnised.

For gifts that were non-marriage-related, estate duty was levied unless they were given at least five years before death. With the abolition of estate duty, there is now no need for such early gifts. And for those who still want to make such gifts, there is no fear that estate duty will be levied if death occurs within five years of the date of the transfer.