Arranging to salary sacrifice super contributions might sound like taking a voluntary pay cut, but don’t let the name fool you. Salary sacrificing can be a tax-effective way to make your income go further, and it can also be a great option for boosting your super.
How does salary sacrificing work?
Salary sacrificing (or salary packaging) is an arrangement you make with your employer to withhold a portion of your pre-tax salary. In exchange, you get another type of benefit — for example, a car or a computer — which is paid for out of your pre-tax salary.
With a salary sacrificed super contribution, your employer agrees to pay part of your salary straight into your super account. This is on top of the compulsory Superannuation Guarantee (SG) contributions your employer makes, which are currently 9.25% of your pre-tax salary.
Even if your retirement is still a long way off, paying a little extra into your super now can make a big difference in retirement
Why salary sacrifice?
Of course, everyone likes to get more for their money while paying less tax, and salary sacrificing can help you do that.
Salary sacrificing super contributions can allow you to take advantage of tax benefits while helping to boost your super balance because they come out of your pre-tax earnings and are not counted as assessable income for taxation purposes, which means you could pay less income tax each year.
What’s more, if you make super contributions through a salary sacrificing arrangement, they’re taxed in the super fund at a maximum rate of 15%. Generally, this tax rate is less than what you would pay if you did not enter into a salary sacrifice arrangement.1
This means salary sacrificing can be an especially useful strategy if you’re in a higher tax bracket. Just say your income is taxed at 46.5% (including the 1.5% Medicare Levy). You could save 31.5% in tax on the amount you put into your super via salary sacrifice, rather than by topping up your super from your after-tax earnings.
How much super will I need?
You may think that it’s enough that your employer contributes to your super — but in reality, these payments are unlikely to provide a comfortable lifestyle in retirement.
According to the Association of Superannuation Funds of Australia (ASFA) Retirement Standard, a single person will need about $430,000 in today’s dollars for a comfortable retirement, while a couple will need $510,000.2 Even with compulsory SG contributions set to rise to 12% by 2019, the unfortunate reality is that many Australians will come up short.
If you end up in this situation, you may have to keep working longer than you’d planned or adjust to a more frugal lifestyle.
Paying a little bit extra into your super now by salary sacrificing super contributions means that your salary sacrificed contributions increase your super balance, helping to fund your retirement. And chances are, it will probably only make a small difference to your take-home pay.
Case study
Julia is 40 years old and single. She is currently working full time and earns $60,000 a year. Over the years, she has had a couple of career breaks and now her super balance is $50,000.
If Julia relies on compulsory employer SG contributions alone, by the time she turns 65 she’ll have around $401,000 in her super account. But with a weekly pre-tax salary sacrifice of $50, she could end up with an extra $100,000 by the time she turns 65.3
How do I get started?
Ask your employer whether they offer the option to sacrifice part of your salary into super. If they do, it’s usually just a matter of filling in a form. It can also be a good idea to speak to a professional financial adviser to find out whether salary sacrificing is best for your situation and retirement goals.
1 The concessional tax treatment is limited to a set amount of contributions made each income year.
2 AFSA (2013) Retirement Standard, p4. http://www.superannuation.asn.au/resources/retirement-standard
3 See calculation assumptions at http://findyourfuturecalculator.com.au/cfs/calculator.
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