Many people tend to ignore their super and put off thinking about thier retirement until it's just around the corner. Adding to your superannuation contributions can be an easy, tax effective way of topping up your super.
What is salary sacrifice?
Salary sacrifice is where you 'sacrifice' some of your gross salary and instead of receiving this part of your salary, your employer pays the same pre-tax amount into super for you.
The benefits of making salary sacrifice contributions to your superannuation fund come from the lower tax rates that apply to superannuation investments compared to investments outside super.
3 ways salary sacrifice can help you boost your retirement
1. It is tax effective
Income tax is payable only on income you actually receive, so you do not pay income tax on salary sacrifice contributions to super. Your super contributions are taxed at the maximum rate of 15%, representing a significant tax saving particularly if you are on the highest marginal tax rate of 46.5%.
Also, by making a salary sacrifice contribution it is possible that your taxable income is reduced and you are brought down into a lower income tax bracket, further reducing your income tax bill.
2. More money is available for investment
The difference in taxation means that more money is available for investment than if you were to receive the money as after-tax income and then reinvest it.
3. You pay less tax on returns from your super investments
The maximum tax on investment earnings from your superannuation is 15%. This is often significantly better than the tax on returns outside super which can be as high as 46.5%.
"The tax benefits of sacrificing a small amount of your salary today can make a big difference to your retirement income in the future"
While there are possible benefits from making addtional contributions to your super fund via salary sacrifice, you need to consider your individual circumstances.
Money we set aside for our retirement is generally locked into our superannuation fund until retirement. If you feel you may want access to this money before then, salary sacrifice may not be the most appropriate means of saving for you.
How do you organise salary sacrifice super contributions?
Before implementing a superannuation strategy such as salary sacrifice, it is important to seek personal financial advice. This will ensure that you maximise the tax benefits from your super and other investments, and that you find the best way to save for the retirement that you want. If salary sacrifice is for you, your financial adviser can help arrange this through your employer.