One of the easiest ways to build wealth is to put things on autopilot and avoid fiddling. Superannuation is a terrific example of that, with most of our employers contributing 9.5% every pay cycle on our behalf.
But while that’s bubbling away happily, it’s worth noting there are other ways to build your superannuation balance for your retirement, which might also give you more financial breathing space along the way.
We’re talking about salary sacrifice. Or the practice of bumping up your regular contributions above the compulsory 9.5%.
Broadly, sacrificing more of your salary now can help you:
- Minimise tax
- Buy your first house
- Boost your options
The Government wants to make sure we can mostly pay for ourselves once we’ve retired. But we’ll need a fair bit to stay comfortable, so they encourage us to add more than the designated 9.5% into our super. That encouragement comes in the form of a lower tax rate.
Concessional (before-tax) superannuation contributions are currently taxed at 15%. That means, for every dollar your employer puts into your super fund, the Government takes 15 cents. To learn more about the different types of super contributions you can read more here.
The rest of our take-home pay is also taxed, but that tax rate depends on how much we earn. Generally, the more we earn, the more tax we pay, and for many people it’s more than the 15% we pay for making a contribution into our super.
Salary sacrificing is arranging with your employer to have an additional amount from your salary paid directly into your super fund, before it hits your bank account and you’re taxed your regular income tax rate. Instead, you’ll pay the skinny 15% super tax rate on that money.
Note! Under the Government’s Low Income Superannuation Tax Offset (LISTO) Scheme, if you earn less than $37,000 in a financial year, you will receive a refund from the Government of up to $500 of the 15% contributions tax you paid on concessional contributions (SG contributions and Salary Sacrifice contributions) paid into your super account. You can read more about the LISTO Scheme here.
Note! This 15% tax rate applies to those earning $250,000 or less in a financial year. If you earn more than $250,000 a year and you want to contribute more to your super, then your additional contributions will be taxed at 30% plus the Medicare Levy.
Another note! The concessional contributions tax rate applies to concessional superannuation contributions up to $25,000 per financial year. The cap covers your employer’s Super Guarantee contributions (generally 9.5% of your ordinary time earnings, but could be more, so check your payslip) and any Salary Sacrifice contributions that you arrange. If you contribute more than $25,000, the excess contributions will be taxed at your marginal tax rate and incur a further interest charge. In some cases, if you haven’t met the concessional cap in the previous financial year, you can carry forward the unused portion of the cap into the next year. This is called the “Unused Concessional Cap Carry Forward” and you can read more about the eligibility requirements here.
Remember! Salary sacrificing doesn’t lock you in forever. You can ask your employer to stop making salary sacrifice payments on your behalf whenever you like.
This might seem like a game of accounting – and it is! – but over time, that money you’re saving will help build a powerful superannuation balance, without you really having to do much at all.
Fast track your savings, buy your first home
Did you know you’re allowed to withdraw some of your superannuation early to buy your first home? It’s called the First Home Super Saver Scheme. Because our superannuation account attracts that skinny 15% tax rate, as opposed to our regular income tax rate, it can help us save more money, faster. Lots of people choose to sacrifice a portion of their salary into their super in order to build up their money faster, and when they’ve got enough, they can withdraw it from their super account and use it towards a deposit for purchasing their first home.
Remember! This scheme is only available for your first home, and you need to check if you’re eligible. So if you’re hoping to turbo-charge your savings for an investment property, or to build your own airstrip, start a flamenco business, or take up yacht racing, you won’t be able to get those dollars out of your super until you’re at least 65.
Plan for contribution gaps, boost your options!
Compound interest works its magic when you increase the numbers and contribute consistently. By missing a year or two of superannuation contributions, you miss out on a large chunk of that compounding butterfly effect, and it takes a lot longer to make up the difference.
Salary sacrificing is a powerful way to build up a buffer in your superannuation fund and prepare for some working gaps. If you decide one day to take time out to travel or to care for your family, previous salary sacrificing efforts might have built up enough to smooth over the gap. If you can foresee yourself taking a break from regular working (and contributions), salary sacrificing earlier can leave you in just as good a place upon retirement, so think about upping your contributions earlier so you can take a break later.
How does salary sacrificing work?
Take your time to consider whether salary sacrificing makes sense for you and whether it supports your financial goals. If you’re ready to get started, speak to your employer about how to go about setting up a salary sacrifice arrangement and consider how much you want to allocate away from your take-home pay and into your super.
You can also find a great overview of salary sacrificing in detail here.
How will that affect my take-home pay?
Of course, the more money you’re putting into superannuation, the less money you’ve got in your pocket for things now. This means less money right now for rent, bills, travel, and brunch.
So, it’s worth thinking about how much you can genuinely afford to sacrifice because you really can’t touch this money until you’re 65.
If bumping up your super contributions means you’ll struggle to pay rent, or restricts your movement and autonomy, then it might be worth considering holding off on salary sacrificing for now.
Remember, money is only ever a tool enabling you to live your life well and fully. Balancing your present and your future can be a juggle. Sit down and work out what you need to pay for, what you can live off, and what you can reasonably manage to sacrifice. It might not seem like you’re adding too much extra but, thanks to compound interest, a little sacrificed today can go a long way in the future.
Get in contact with us at firstname.lastname@example.org or call 1300 799 482 to ask any questions you have about super.