Quite often superannuation is overlooked at the start of a young person’s career. But as with most things in life, forward planning will yield the best results when it comes to your retirement and financial stability. One of the things we most often hear from our clients is, “I wish I had done more to plan for the future when I was younger”. If this sounds like you, it’s never too late to make a change – reach out to one of our expert financial advisors and chat about the ways you can maximise your contributions. But in the meantime, here are a few changes you can make for yourself, starting now!
How to Boost Your Super
There are several ways you can increase your super’s value. One option involves combining your small accounts into one larger account. Most Australians work for a number of companies over their career, and you may have some old super accounts you have completely forgotten about. The economies of compound interest make this a smart move. Over time, the interest you make on a large sum exceeds what you earn on several small amounts.
Another option for boosting your super is to make after-tax contributions on your own, which qualifies you for a tax deduction on that amount. This works best if you have some sort of windfall that would put you in a higher personal tax bracket. If you opt into putting the cash into your super you could also minimise your personal or capital gains taxes, all while your super account benefits.
Salary Sacrifice for Super
The most effective long-term option for increasing your super is to participate in a salary sacrifice plan. Don’t be put off by the word ‘sacrifice’ – this is not as painful as it may sound! Despite the impression, you don’t have to forego all your disposable income for retirement planning. When you opt to salary sacrifice, what you’re actually doing is asking your employer to put more of your gross (before-tax) income into your super fund. When you speak to your employer’s HR department about this plan, they may refer to it as salary packaging or total remuneration packaging – don’t worry, it’s the same thing.
Take note, not all companies love a salary sacrifice plan; they require more paperwork and implementing a change to the payroll system. As such, most companies require that you negotiate your salary sacrifice when you begin your employment with the company, or limit your super changes to once a year.
Benefits of a Salary Sacrifice
Salary sacrificing was not the most popular way to save for retirement until a couple of changes were made to the super regulations in January 2020. Per the Australian Tax Office website, salary sacrifice contributions no longer:
- reduce the ordinary time earnings your employer is required to calculate your super entitlement on
- count towards the amount of super guarantee contributions that your employer is required to make for them to avoid the super guarantee charge.
This second change is the most important one; prior to 2021 your employer could include your salary sacrifice in their mandated 9.5% super contribution, effectively shortchanging your retirement account. Now, from 2021, they are required to contribute the 9.5% regardless of your personal additions.
Yes, you will see a slight reduction in your take-home pay, but the tax burden on that money is capped at 15% for the vast majority of the Aussie workforce. If your income is more than $250,000 annually, the tax rate bumps up to 30%, but if you are in that tax bracket you would probably have other investment instruments to offset that rather aggressive number.
The primary incentive for this kind of super boost is that between you and your employer, you can put up to $27,500 of pre-tax earnings in your super account every year. Another tax benefit is that earnings made inside the super bubble may be eligible for additional tax breaks, which could benefit you when you do retire and start drawing the income.
Things to Consider
Before you opt to salary sacrifice, it’s essential that you have a strong understanding of your household budget so that you can accurately plan how much to contribute to your salary sacrifice. Carefully review your expenses to make sure that additional contributions make financial sense – using extra cash to pay off your mortgage early and saving those interest payments may be more practical than boosting your retirement.
Before you decide to increase your retirement savings with a salary sacrifice plan, have a conversation with Super Network to ascertain not only how much you can contribute, but to ensure that your super investments are right for where you are in your career. As your retirement gets closer, you’ll want more conservative investments since you will be accessing the income sooner; if your retirement is more than ten or 15 years in the future a more aggressive investment plan might be more appealing. At Super Network, we can help you determine the magic number for your personal contributions; one that maximises the tax benefits while ensuring you have adequate cash flow and savings for unforeseen expenses.
If you would like to know more about creating a financial plan that takes advantage of salary sacrifice, contact us now for a free consultation.
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