A salary sacrifice plan to save tax and boost super benefits can be started at any time, but the beginning of a new financial year is best. That gives a benefit for the whole year. If a person sacrifices $100 per week of salary, over $5,000 extra is contributed.
Salary sacrifice means giving up some spending now so we can spend more in the future. We all face the daily puzzle of how much to consume today and how much to put aside for tomorrow.
When we put money aside and invest, we gain the benefit of compound interest over the long term, a very powerful force. Interest on interest on interest builds value quickly without effort from us.
Sacrificing salary into super saves income tax. Contributions are paid out of pre-tax pay. That gives the same effect as putting cash savings into super, claiming a tax deduction, and receiving a tax refund.
Employer super guarantee and salary sacrifice contributions incur 15 per cent tax on entry to the super fund, and 15 per cent tax on ongoing income. That can be compared to our personal marginal tax rate. Our rate could be 34.5, 39 or 47 per cent including Medicare Levy.
Salary sacrifice works well for people in those tax brackets. For people paying only 21 per cent the benefit is small at 6 per cent. Those under the income tax threshold should not salary sacrifice but put in $1,000 to earn the $500 government co-contribution.
The least painful way to save for a large future expense is to have a small amount deducted each payday. If it is subtracted at source, expenditure will adjust down to consume the reduced income available to it.
A small super savings amount each payday will make a big difference at retirement. Suppose a worker sacrifices $100 per week into super for the last 15 years of their career and the fund earns 8 per cent per annum. They will have an extra $127,000 at retirement.
That will boost their retirement income by around $600 per month, giving a much better living standard. The annual contribution limit of $27,500 must be kept in mind, though people with balances under $500,000 may be able to put in catchup amounts.
If a person sacrifices $100 into super it doesn’t cost them $100 of after-tax pay. The reduction in take home pay is only $65.50 for those in the most common tax bracket, and less for higher earners.
Workers under age thirty are usually focused on their mortgage and childrens’ costs. After thirty starting a small sacrifice is wise, then slowly increasing the amount over time. From age fifty contributions should be larger. Salary sacrifice is arranged through the pay office.