We often talk about the retirement savings gap and the need for more Australians to direct a greater portion of their income into superannuation. The contributions derived from the accumulated super over the working life of an individual can offer financial leverage in their retirement age.
There’s no doubt that a big savings gap exists, but by using salary sacrifice strategies from your work income and starting the process early, the potential to accrue additional savings into your superannuation can have major benefits, even for the average income earner.
Salary sacrifice is simply the term for using your pre-tax salary income to make voluntary contributions into your superannuation. In effect, you are forgoing a portion of your salary, but it may be a sacrifice well worth making.
For people that are paying the highest marginal tax rate - that is 46.5 percent, the benefits of salary sacrificing can be significant. Not only will you benefit from paying only 15 percent tax on the amount sacrificed instead of the marginal tax rate, but directing the right amount into your superannuation may also:
The Federal Government’s announcement in the 06/07 budget to reduce the marginal tax rate means some individuals will have the ability to reduce their taxable income by salary sacrificing. Furthermore, because the individual’s personal income tax is reduced, there is more disposable net income available and the affordability of salary sacrificing into their superannuation is greater.
Working out your net income requirements is really the first step in calculating how much gross income you can afford to salary sacrifice into superannuation. Let’s take an example of someone earning a $100,000 gross salary (net of superannuation guarantee contributions) and requires a net income of $60,000 per annum.
The following table highlights how a salary sacrifice strategy is used to achieve this under both the old and new tax system. The figures show that it’s possible to salary sacrifice more in the new tax regime, end up with the same income, and substantially increase your superannuation savings.
Salary sacrifice pay-off
As the table shows, the net increase in super is $3,145 per annum despite no drop in income.
For people approaching 60 in particular, salary sacrificing a large amount of income often becomes a necessity to ensure there are more concessional taxed dollars being directed into superannuation savings that will be used as a pension income stream post retirement.
Rather than having to contribute a greater portion of your income into superannuation a few years prior to retirement, salary sacrificing into your superannuation earlier in your working life will result in a higher level of retirement income without compromising your lifestyle.
We’d be happy to discuss any salary sacrificing options and queries you may have in more detail. Please contact us to make an appointment so we can get you on the right path to retirement.
