Which retirement income stream do you choose?
Research from Colonial First State shows retirees increasingly prefer pensions and annuities to lump sums. But which income stream is right for you?
Want to earn more super — and potentially pay less tax? Then it’s time to take another look at salary sacrifice.
Salary sacrifice is one of the most effective ways to grow your super savings while potentially paying less tax. Simply by asking your employer to pay part of your pre-tax salary into super, you can make a difference to your future, while potentially reducing the tax you pay today. Yet recent research shows fewer Australians have been using this simple but powerful strategy since the GFC.
The proportion of fund members choosing to salary sacrifice has slipped from 24% to 17% over the past 10 years.1 Even more worryingly, 5% fewer women than men have been using the strategy, despite being likely to retire with less super due to lower salaries and more frequent career breaks.
The good news is that salary sacrifice is just as effective as ever — and, as long as your employer offers it as an option, it can be as simple as filling out a form. So here are three good reasons to take a fresh look at salary sacrifice and consider making it part of your financial strategy:
1. A small sacrifice today can make a big difference tomorrow
You can make a big difference to your balance at retirement by making relatively small contributions over time.
For example, a 50-year old with $120,000 in their super now, who is earning $90,000 a year, could end up with $59,662 more in their super by the time they turned 70, simply by salary sacrificing 3% of their salary each year. That’s a mere $52 a week before tax — which equates to around $31 from their take home pay.2
A 50-year old earning $90,000 a year could end up with $59,662 extra super simply by salary sacrificing 3% of their salary each year.
2. It's tax effective
Salary sacrifice also has the benefit of potentially reducing the amount of tax you pay now. That’s because your contributions come from your before-tax pay, lowering your assessable income for tax purposes.
What’s more, the money you salary sacrifice into your super is taxed at just 15% - provided you stay under your concessional contributions cap.
If you’re paying a tax rate of more than 15%, this could save you a great deal on tax, while at the same time enabling you to add more to your super than you could with an after-tax investment.
For example, if you’re currently paying tax at a rate of 39% (including the 2% Medicare Levy), you could save 24% in tax on the amount you put into super through salary sacrifice. This means you could build your savings faster, with the same contribution.
3. It's easy
Salary sacrificing couldn’t be easier. You simply instruct your employer to pay some of your pre-tax salary as super. That money then goes directly into your super, along with the super guarantee contribution (currently 9.5% of your salary) that your employer already makes for you.
Too effective to ignore
With these potential benefits, salary sacrifice remains a strategy that’s too effective to be ignored. A financial adviser may help you decide whether salary sacrifice is right for you, and help you get the most from this contribution strategy.
1 Jun Feng and Paul Gerrans, Patterns of voluntary worker retirement savings: a longitudinal analysis, 2014.
2 ASIC’s MoneySmart Superannuation Calculator: Based on a marginal tax rate of 37% and 2% Medicare Levy, with contribution fees of 1% and Management costs of .50%.