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Many Australians will find themselves short-changed in retirement with insufficient superannuation to enjoy a comfortable lifestyle. One solution to the super shortfall is by making ‘salary sacrifice' contributions. This involves adding to your super from your before-tax salary, and it’s a simple way to grow a pool of savings for tomorrow while cutting back on the tax you pay today.
More super in retirement. Less tax today.
Relying solely on your employer’s compulsory super contributions to fund your retirement could see you struggle financially when your working days are over.
The latest Westpac/ASFA Retirement Index (September 2010) shows that a couple needs a combined annual income of at least $53,729 to enjoy a ‘comfortable’ retirement lifestyle. This is a far higher income than any of us can expect to receive through the age pension. Without additional super contributions of your own, there is a good chance you won’t have sufficient super savings to fund a decent retirement lifestyle.
A simple and tax-friendly way to build your superannuation savings is through ‘salary sacrifice’. It means having part of your pre-tax wage or salary paid into your super fund rather than you taking the money as cash in hand at payday.
The advantage of salary sacrificing is that your super contributions are taxed at just 15%. That’s far less than the 30%, 37% or 45% marginal income tax you would pay on your salary or wages if you earned $37,000 or more annually, so more of your money goes into your super to work towards funding your retirement, rather than it going to the tax office.
Salary sacrificing also reduces your current taxable wage or salary, so you enjoy valuable tax savings on today’s income too.
Case study - Salary sacrifice makes sense
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Grace boosts her retirement nest egg by $110,000 through salary sacrifice
To see how effective salary sacrifice can be in building your super, let’s look at Grace, who at age 30 earns an annual salary of $85,000 and has a current super balance of $50,000. If she relies only her employer’s contributions, at age 65 Grace will have $474,000 in super.
Grace is keen to grow her savings for retirement, so she speaks with her employer and arranges for $150 of her before-tax salary to be paid into her super fund each fortnight rather than receiving the money in her hand. After deducting 15% for contributions tax, Grace is actually adding $127.50 each each fortnight to her super balance.
If we assume that Grace’s super fund earns an average annual investment return of 7.4% before tax, by the time Grace reaches age 65 her salary sacrifice contributions would have taken her final super payout to $584,000. This is $110,000 more than her super payout built on employer contributions alone.
In contrast, if Grace hadn’t elected to invest $150 of her pre-tax salary into her super, she would have been paid that $150 as part of her normal pay. With normal income tax taken out, Grace would have received around $92 of that $150 as money in her hand.
Things you should know
All calculations assume a current salary $85,000. Initial investment value $50,000. Balanced/default fund return is based on 3% above inflation, and inflation is assumed to be constant at 2.5%. Active fund return is based on 4.5% above inflation. Returns are net of fees and tax. Consider your personal objectives, financial situation and needs before acting on the information. Past returns are no guarantee of future performance
To find out more
Find financial advice on salary sacrificing your super?
Need a financial adviser or just want to talk through your options? At BT we can give you general and limited advice on how to invest your super. Or we can help you find a registered financial adviser who can help you with personalized financial advice. Just call us on 1800 104 800 to discover how to set up a salary sacrifice arrangement to boost the value of your super fund.
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Things you should know
All calculations assume a current salary $85,000. Initial investment value $200,000. Balanced/default fund return is based on 3% above inflation, and inflation is assumed to be constant at 2.5%. Active fund return is based on 4.5% above inflation. Returns are net of fees and tax. Consider your personal objectives, financial situation and needs before acting on the information. Past returns are no guarantee of future performance.
