Is it worth salary sacrificing into super?

What is salary sacrificing into super?

Salary sacrificing into super involves redirecting a portion of your pre-tax salary into your super fund. Instead of receiving this portion as part of your take-home pay, it goes straight into your super account.

Here’s how it works:

Agreement – You and your employer agree to sacrifice a specific amount or percentage of your pre-tax salary into your super fund. This amount is in addition to the compulsory employer contributions.

Pre-tax – The sacrificed amount is deducted from your gross (pre-tax) salary, reducing your taxable income. This means you pay less income tax on your take-home pay.

Super contributions – The sacrificed amount is added to your superannuation contributions, helping you build a more substantial retirement nest egg.

The benefits of salary sacrificing into super

Tax savings – One of the primary advantages of salary sacrificing into super is the potential for significant tax savings. The sacrificed amount is taxed at the concessional super tax rate of 15%, typically lower than the tax rate you pay on your income. This means you get to keep more of your money while still saving for retirement. You may pay an additional 15% tax on all or part of your salary sacrifice if your income exceeds $250,000. In this case, the effective tax on your contributions may be up to 30%, which is still less than the highest tax rate of 45%.

Faster retirement savings growth – By contributing more to your super fund through salary sacrificing, you’re accelerating the development of your retirement savings. Your money is invested over an extended period, potentially leading to more substantial gains through compound investment returns. Compound investment returns refer to earning money not just on the original investment but also on the accumulated growth gained over the period since the investment was made.

Lower taxable income – Since the sacrificed amount is deducted from your pre-tax salary, your taxable income is reduced. This can have several additional benefits, such as qualifying you for certain concessions, helping you stay in a lower tax bracket and reducing your Medicare Levy (salary sacrifice contributions are not subject to the Medicare Levy or the Medicare Levy Surcharge. This can lead to significant tax savings, especially for higher income earners.)

Automatic savings – Salary sacrificing is an automated process. The money is taken out of your pay before you see it, which can help you build disciplined savings habits.

Long-term financial security—Sacrificing salary into a super fund is a smart way to build long-term financial security during retirement. Knowing that you’re taking proactive steps to build a comfortable retirement nest egg provides peace of mind.

Things to consider before salary sacrificing into super

Contribution caps – The annual limit on the total amount of super contributions from your employer, including salary sacrifice into super without incurring additional tax in Australia, is $30,000 from 1 July 2024. The cap limits change over time, so knowing the current contribution cap limit is essential. Those who have a superannuation balance of less than $500,000 on 30 June 2024 will also be eligible to use up any “carry forward” (unused) concessional caps from the previous five financial years, i.e. 2020 to 2024, which could be as much as $162,500 in 2024/25.

Your financial goals – Consider your overall financial goals when deciding how much to sacrifice your salary for super. For example, most people want to retire debt-free. You should strike a balance between your short-term and long-term financial needs. What kind of lifestyle do you envision for your retirement? The more comfortable you want it to be, the more you may need to save. However, suppose you have pressing financial commitments like mortgage repayments or are saving for something particular. In that case, it might be wise to sacrifice less of your current income into super.

Access to funds – Remember that once your money is in your super fund, you can only access it in retirement or if you meet certain conditions. Super is designed for retirement savings, so accessing your money before you reach preservation age can be challenging. From 1 July 2024, the preservation age will be 60, so if you need access to funds before then, you are better off saving for it outside of super. Ensure you have enough liquid assets outside of super, such as cash or shares, to cover emergencies or short-term financial needs.

Reduced take-home pay – Salary sacrificing means you’ll have less money in your take-home pay. This can be challenging if you’re on a tight budget or have immediate financial needs, such as your mortgage.

Investment risk – Your salary sacrifice contributions are invested; like any investment, they come with inherent risks. Depending on market performance, your super balance can fluctuate.

Seeking advice – It’s a good idea to consult a financial adviser or accountant before implementing a salary sacrifice strategy. They can help you assess your unique financial situation and provide personalised recommendations.

Is it worth salary sacrificing into super?

The answer depends on your financial circumstances and goals. Do you have outstanding debts or immediate financial needs that should be prioritised over extra super contributions? Having a solid financial foundation is crucial before diverting funds into super.

For many Australians, especially those who can afford to do so, salary sacrificing into super can be a highly effective way to boost retirement savings, enjoy tax benefits, and secure long-term financial stability.

Higher-income earners tend to benefit more from salary sacrificing due to the potential for substantial tax savings. Still, the benefits are not exclusive to the top income bracket.

It is sensible to strike a balance that suits your overall financial plan and stay informed about any legislation or contribution cap changes. As your financial circumstances are unique, we encourage you to contact the team at DFK Everalls to discuss potential tax benefits from salary sacrifice or the team at Everalls Wealth Management regarding where this fits into your overarching financial goals.