You know that your super is important, because it’s what you’re going to live on after you retire. But should you be making extra payments into your super now? And how can salary sacrificing offer you benefits?
What is salary sacrificing?
Salary sacrificing is when your employer pays part of your wage into another benefit (e.g. super, but could also be your mortgage in special circumstances) instead of paying it all to you.
Why is salary sacrificing beneficial?
The main benefit of salary sacrifice is that it may decrease the amount of tax you have to pay, increasing your overall net worth. This is because super is taxed at 15% for employer contributions (including salary sacrifice) whereas your take home pay may have a higher marginal tax rate (up to 47% for higher income earners). If you earn over $37,000 per year, there will be a tax benefit for you in choosing to salary sacrifice into super.
How much can you benefit from salary sacrificing?
Let’s use an example so you can see the benefit of salary sacrificing your super.
Let’s assume you are earning $8,000 per month. According to the ATO tax calculator, you pay $2,080 in tax each month, giving you a net pay of $5920 per month.
How does this change if you salary sacrifice $1000 to your super?
Your super views this $1000 as an employer contribution, and it is taxed at 15% ($150), leaving $850 in your super. Your employer is now paying you $7000 per month, which means that you pay $1716 in tax, giving you a take home pay of $5284.
You are now earning $636 less per month, but your super balance is going up by $850. You’re more than $200 ahead!
(You can use the ATO tax calculator and your own before tax income to calculate the difference that salary sacrificing will make for you.)
Although it feels like you’re earning less money (after all, your take home pay has decreased by more than $600), that money is waiting to support you in retirement. If you make this change after receiving a large pay rise or after paying off your HECS debt, you might not even notice the change in your take home pay. This is a great time to set yourself up for the future.
How much can I salary sacrifice?
From July 2017, there has been a limit on concessional contribution to your super of $25,000. Concessional contributions include your employer’s mandatory contributions (9.5% of your wage) as well as any amount salary sacrificed into your super. This means that you should try to keep your contribution below $2500 – 9.5% of your wage for the year, to keep your contributions tax effective.
What are some reasons not to?
Your super can’t be accessed at any time. At the moment, you can access super when you turn 65 or reach the preservation age (between 55 and 60 depending on your age) and stop working full time. However, these ages can be changed by the government introducing new laws.
What happens if you have some sort of emergency and the cash you’ve been working so hard to save is tied up in super? Or what if you want to retire earlier than 60 but aren’t able to access your super?
There are many benefits to salary sacrificing into super, but it may restrict you in the future. If you are nearing retirement (over 45 or 50), salary sacrifice may be an excellent way for you build up your retirement nest egg. If you’re still in your early 20s and hoping to save up a deposit for a home, you may want to keep the money in cash. Ultimately, it depends on your financial position and goals. Talk to a financial adviser if you’re unsure what the best option is for you.