24 Nov The salary sacrifice puzzle: saving vs spending
Salary sacrifice or “salary packaging”, is an agreement between an employer and employee, where the employee forgoes part of their wage in return for a benefit equal in value to the salary it’s exchanged for.
Benefits included in a salary sacrifice agreement range from cars, property and expense payments, with the most common being super.
Why salary sacrifice?
A recent report released by the Financial Services Council and Commonwealth Bank revealed the idea of retiring at 60, is becoming redundant. The reason: a startling majority of Australians simply aren’t on track for a comfortable retirement. Sadly, the report uncovered only 1 in every 2 couples will have the flexibility to take a holiday when they please, buy unplanned gifts for their grandchildren and most importantly, live without the stress of how they will pay their next bill.
A numbers game
Salary sacrifice was introduced by the Government to encourage people to better prepare and save for retirement.
The average Australian income is approximately $80,000 p.a. For every effective $100 dollars they earn, $39 goes to tax, leaving $61 for the individual.
In this tax bracket, if the same person were to salary sacrifice $100 each pay into their super fund, it is taxed at a maximum rate of 15%: less than the marginal tax rate. This would mean $15 now goes to tax and $85 into the individual’s super fund.
The myth: busted
A common misunderstanding of salary sacrificing is “I will be out of pocket”. Based on the above, by salary sacrificing $100 a week it doesn’t mean you will be out of pocket $100. Remember: when you opt NOT to salary sacrifice, $39 of your $100 goes to tax, leaving you only $61. Therefore, salary sacrificing only hits the back pocket by $61.
The greatest benefit of salary sacrificing towards your superannuation is boosting your super while saving on tax.
If a 40-year-old was to salary sacrifice $100 into their super each week until they were 65 they will forego $80,000 over 25 years. However, they will have added approximately $290,000 to their super for retirement.
Is there a downside to the flipside?
There are rules and limitations to the amount you can salary sacrifice so it’s important to seek advice.
Currently, Government regulations mean the money you put into your super can’t be touched until you’re 60. So if you plan to retire before 60, you must consider how you will fund your retirement.
If you choose to salary sacrifice, you need to be invested in a good fund with the most appropriate options to suit your financial goals. When most people enter the work force they are provided a default super fund from their employer. However, they could be losing opportunities and benefits from a more appropriate fund to meet their needs.
Reviewing the salary sacrifice option is also a good time to review your super fund and investment options.
Want to learn more about how salary sacrificing can help you?
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The above projection return is based on 7% p.a. after fees and taxes, a superannuation contribution tax rate of 15% and an individual marginal tax rate of 39%.