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Salary Sacrifice
An effective 'salary sacrifice' strategy now, could be the key to getting more from your super in the future.
Putting together these two dictionary definitions may help clarify what 'salary sacrifice' is - giving up salary (something of value) for the sake of something important (in this case, super contributions and your future retirement income). What the dictionary doesn't tell us is how this works in practice and why salary sacrificing to super may be beneficial depending on your personal circumstances.
Most employees receive employer super guarantee contributions of at least 9% of their salary. Many also top-up their super using available money at the end of the financial year. A third option, which can be an easy, tax-effective way of topping up your super, is to salary sacrifice to super. This simply involves agreeing with your employer for some of your pre-tax salary to be paid directly to your super fund, before income tax is deducted. The sacrifice comes from not having that amount paid to you as "in-your pocket" salary. There are two very important reasons why salary sacrifice can be an effective way to save for retirement.
1. Tax effective
You don't pay income tax on amounts you salary sacrifice to super. Instead your super contributions are usually taxed at 15%, which can be much less than your marginal tax rate.
Let's say you earn $85,000 a year. Your marginal tax rate is 39.5% and your total tax bill is $21,025. If you salary sacrifice $5,000 to super, your salary is now $80,000, your income tax has reduced to $19,050. The $5,000 is contributed straight to your super fund, where it is taxed at just 15% ($5,000 x 15% = $750). So overall you've gone from paying $21,025 in tax to $19,800 ($19,050 + $750), a saving of $1,225.
2. Grow savings more quickly
As well as helping your savings grow by having more to invest, salary sacrificing to super can mean higher investment returns, once you take tax into account. This is because the maximum tax on investment earnings from super is 15%. The same investment earnings outside super are taxed at your marginal tax rate, up to 46.5% (including Medicare levy).
We've seen how the end result of a tax-effective salary sacrifice strategy can mean more retirement savings. This strategy combined with the benefits of compounding your returns in superannuation can mean higher retirement savings, and more flexibility with your retirement plans - for example, an earlier retirement or a higher or longer-lasting retirement income. So, even a small salary sacrifice each year while you're working can have a very important outcome when it comes time to retire. We recommend you contact us to see if this strategy may suit you.
Please note that superannuation is a long term investment. By salary sacrificing into super you will be preserving these funds, this means you will not be able to access them until you meet a condition of release such as turning 65 years of age or retiring after your preservation age.
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