Thursday, January 3, 2013

SSPN Tax Relief vs Higher Div rates outside

So in my previous post, I wrote on how to reduce your taxable income, especially starting 2012, the government has increased SSPN taxable relief to RM6,000. So then we started to discuss, if you can get better returns outside, say 5% compared to say SSPN gives 3% dividend, does it still make dollar sense to go for this tax relief.

If you google like from SenseOfMoney, the average div (simple averaging) is 3.56%. So let's do a comparison to see what % of dividends you should expect from other sources if you decide to not invest in SSPN. Let's assume SSPN pays out 3.5%. The RM6,000 tax relief is from 2012 to 2017. Believe after that would reduce down to RM3,000 or extended. So to keep things simple, we shall calculate based on saving RM6,000 yearly in SSPN from 2012 to 2017 with returns of 3.5%.

 *Note one key assumption to the below calculations is that the tax relief savings you get, you save back into your SSPN (to keep it simple). Now  if you save the tax relief savings into a higher yield vehicle, this should translate into higher total savings.

If you're in the 19% tax bracket, your compounded returns with the above assumptions should be RM48,405 (RM48k):

To have comparable returns from external sources that don't give you the tax relief on your RM6k savings, you'd need to find a vehicle that gives you 8.5% per annum on average:

Now, for those big buck earners, who've reached the highest taxable bracket; 26%, your compounded returns for a yearly savings of RM6k would be RM51k.

 To have comparable returns from external sources that don't give you the tax relief on your RM6000 savings, you'd need to find a vehicle that gives you 10.5% per annum on average:

Remember though that SSPN when compared to bonds, FD, mutual funds and so on has certain difference i.e withdrawal requirements, capital guaranteed and so on. So take this into considerations too, e.g. the flexibility you require with your hard earned money, and the amount of cash you have.

If you notice anything that doesn't quite seem to add up, please leave a comment. This in based on my own understanding and calculations. 


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Nic said...

This is a good overview of the calculations for SSPN. However, the % changes depending on the timeframe. If it is immediately after 1 year, the equivalent return is 26% for highest tax bracket but if you extend it, the average equivalent return comes down to about 7% for 15 years because the tax relief benefit is spread out. Also, for accuracy, I would use 6000 as total invested in SSPN and 4440 as investment number.

Lukman Iqbal said...

Hi Nic,
the allowance is RM6000 per year till 2017. "personal tax relief for saving deposits placed with SSPN-i for the benefit of their children be increased from existing RM3,000 to RM6,000 effective from year of assessment 2012 to 2017"
So why would the average equivalent come down to 7%, since for every year from 2012-2017 you could deposit RM6k yearly and get the RM6k relief for each year till 2017. After 2017, i'd continue to deposit RM3 per year based on the relief. Yes the calculations does get complicated. Some sites say you can withdraw the whole amount the following year, so could you in 2018 withdraw all the sayings and then put it in another email.


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