Salary sacrifice: A lot less painful than it sounds

Money and Life
(Financial Planning Association of Australia)

Maybe you've heard about salary sacrifice as a way to increase your retirement savings. But did you know it can be a very tax-effective way to make voluntary super contributions? Find out how you could boost your retirement savings and pay less tax all in one go.

What is salary sacrificing to super?

In very simple terms, salary sacrificing into super means paying an amount from your pre-tax salary into your chosen superannuation fund. The amount you decide to contribute could depend on lots of things, including how long until you retire, how much you currently pay in tax, and how much you can afford alongside your current financial commitments including mortgage and loan repayments, household bills and other living expenses.

What are the benefits?

Up to a certain amount, these extra contributions are taxed at a rate of 15%. If you're paying a higher marginal rate of tax on your income, you'll save on the amount of tax you're paying. Putting more into your super now helps you build your balance faster, so you'll have more money to draw on when the time comes for you to retire. So this way of saving for a retirement can be a win-win for your tax bill now and your future income when you're no longer working.

As well as potentially saving you money on your tax, there are two other key advantages of saving for your retirement in this way. The first is all about timing and compound interest. The earlier you start making extra contributions, the more potential investment returns you'll earn from your super balance over time. Even a very small contribution over time can make a significant difference in the long run. The MoneySmart Super Contributions Optimiser can show how much impact extra contributions could have on your super balance at retirement. It can also help you calculate whether making extra pre-tax payments is the right approach for your circumstances.

Salary sacrifice can also be a way to make sure you're taking steps to boost your super without having to prioritise payments from your day-to-day cash flow. There can be many reasons to delay saving for retirement, and salary sacrifice can work in your favour by automating your extra contributions so you don't have to make the effort to budget for super savings.

Things you should be aware of:

• Does your employer offer salary sacrificing?

Many employers offer you the option to salary sacrifice contributions into your super but some may not. Check with your company payroll to make sure it's something they can do for you.

• Will your employer continue to pay into your super under the Super Guarantee?

Your employer is required by law to pay contributions to your nominated super fund under the Superannuation Guarantee (SG)[1]. The current SG rate is 9.5%[2], so your employer must pay 9.5% of your annual salary as a contribution to your super.

• Will your extra super payments stay under the annual cap for pre-tax contributions?

Current government policy allows you to make up to $25,000 in pre-tax (also know as concessional) contributions in each financial year[3]. That amount includes the 9.5% SG payments made by your employer. So the amount you'll be able to salary sacrifice will depend on how much you earn and the level of your annual SG contribution from your employer.

• How will making these contributions affect your other financial goals?

Saving for super can be an important goal, but there may be other financial priorities you need to budget for. Saving on interest by paying off your mortgage earlier, for example, could get you further ahead with your finances than saving tax dollars.

• Can you afford to have this amount of money tied up until retirement?

It's important to remember that you won't be able to withdraw from your superuntil you retire or reach your preservation age, except under a few special circumstances. If you think you're going to need access to the extra money you're paying into super, you might want to consider saving or investing it in another way.

Expert help

While salary sacrificing has advantages, it may not be the right strategy for you, depending on your age and circumstances. Advice from a CERTIFIED FINANCIAL PLANNER® professional can help you determine whether salary sacrificing should be part of your strategy for saving for retirement and how much you should contribute to make the most of the benefits.

Saving more into your super isn't the only way to boost your retirement nest egg. Find out more about investing your super for the right level of risk and return to make sure you're maximising your savings and income for retirement.

[1]Australian Taxation Office, Working out if you have to pay super,https://www.ato.gov.au/business/super-for-employers/working-out-if-you-have-to-pay-super/

[2]Australian Taxation Office, Super Guarantee Percentage,https://www.ato.gov.au/Rates/key-superannuation-rates-and-thresholds/?page=23

[3]Australian Taxation Office, Concessional contributions cap,https://www.ato.gov.au/Rates/Key-superannuation-rates-and-thresholds/?anchor=Concessionalcontributionscap#Concessionalcontributionscap