Should you salary sacrifice into super?

Sacrificing some of your pre-tax salary into superannuation…it sounds like a great idea in theory. Who wouldn’t want to save more for retirement?

According to the latest figures for June 2021, a single Australian aged 65 will need $44,818 a year and couples will need $63,352 a year to enjoy a comfortable retirement¹. So clearly it’s a good idea to save more if you can, to avoid falling back on the age pension.

But back in the real world it can be hard to free up spare cash.

When you’re starting out, you might be saving for those big-ticket items – a car, holiday or house deposit – as well as funding your day-to-day living expenses and paying the rent.

When you’re in the thick of it with a mortgage, kids and career, you’ve got plenty of regular expenses chewing up your budget.

And when you’re nearing retirement you might be concentrating on clearing the decks – paying off the mortgage, getting the kids set up.

At every stage of life there are plenty of personal finance balls to juggle. So it’s easy for super to take a back seat, despite your best intentions.

But if you’re able to free up a bit of extra money to put into super, it could make all the difference to your standard of living in retirement, thanks to super’s tax-friendly environment and the magic of long-term compounding investment returns.

Just a little extra saved every week could make a big difference to your retirement nest egg.

To sacrifice or not to sacrifice

We spoke to three ordinary Australians about why they do – or don’t – salary sacrifice.

DAVE – 38

Works in technology, doesn’t salary sacrifice

In technology and my partner tends to take care of the financial side of things. But I’m pretty much across what’s going in and out of our accounts. I decided not to salary sacrifice as we have competing priorities and I just didn’t think I had enough. As well as work, I’m studying at uni, we’ve recently started a family and we’re building a house so it feels like there’s a lot going on!

A few years ago we chatted to a financial adviser who said salary sacrifice could be a good option. We do have a few other investments here and there outside super. I know they aren’t as tax effective but I’m generally comfortable with the way we’re tracking towards retirement.Having said that, once the house is finished in a couple of years, I’ll definitely look into salary sacrifice again when we’re more set up.

SARAH – 35

Works in financial services, used to salary sacrifice

When I came back from working in the UK for five years I was a bit behind on my super so I started salary sacrificing. I was a bit afraid of falling behind everyone I knew after time away from Australia. It was only a small amount every fortnight and I didn’t really miss it from my pay. I salary sacrificed for about three-and-a-half years until I recently bought a house with my husband and that’s when I decided to stop.

The mortgage is our main focus now and our adviser suggested putting the money into an offset loan linked to our home loan instead. I’m reasonably savvy with money as I work in marketing for a financial services company and I check my super pretty regularly, although my husband has no idea! I’m pretty much on track for retirement and my adviser has shown me a projection of what my super balance will be.

I’m definitely planning to salary sacrifice again. I’m worried about having to rely on the government pension and I’ve seen how some people have to make do in retirement. I want to enjoy a comfortable retirement if possible and if it means going without a dinner out or drinks once or twice a week, it’s only a small sacrifice for future financial security. Another thing is that my husband is a bit older than me and I’d like to retire early and go travelling. I definitely don’t want to be working until I’m 67!

MOHAMMED – 23

Works in engineering, does salary sacrifice

For me it was a pretty easy choice to salary sacrifice. I’m pretty responsible with money and I talk to my friends quite a bit about finances – as well as googling for information of course! When I started work my employer suggested salary sacrifice during inductions. I could specify an amount or go for a default of 1%. In the end I chose 3%, which works out at about $80 a fortnight.

The big incentives were the tax benefits and also I’m thinking about using my super for a deposit on buying a house under the First Home Super Saver Scheme. But to be honest I would probably have salary sacrificed regardless. It’s low risk and the money can grow and compound in super – I did some basic maths on how much it would work out to when I retire. And in my line of work I’m conscious of the fact that opportunities tend to taper off by 60 so I want to make sure I’ll be fine if I decide to wind down at work a bit earlier than usual.

How salary sacrifice works

You arrange with your employer to put a specific amount of your pre-tax salary into super. Rather than getting taxed at your usual marginal rate, your regular contributions attract the concessional super tax rate of 15%. Remember there are caps on what you’re allowed to contribute to super every year. In 2021-22 that’s generally $27,500 for contributions including your employer Super Guarantee, salary sacrifice and contributions for which you claim a tax deduction.

Once in super, you can’t access your money until you retire except in certain defined circumstances. But you stand to benefit from concessional tax treatment on earnings and eventual tax-free withdrawals, as well as the magic of compound savings on your long-term investment.

If you’re thinking about salary sacrifice and you’re not sure what the effect would be on your take home pay and super contributions, here’s a handy calculator.

Staying on track for a comfortable retirement

With super there are so many moving parts – contributions, earnings, market ups and downs – that it can be hard to know whether you’re on track or off the pace. Here’s a quick snapshot of the average super balance for your age group, so you can get an idea of how your super savings compare.

Of course, sometimes life gets in the way. You might end up taking a break from work to look after your kids, go travelling or study. Or you might have accessed some of your retirement savings to help get you through COVID as part of the Federal Government’s early release of super scheme.

If you’re planning a career break, here are some tips on managing your super while you’re out of the workforce.

And salary sacrifice isn’t the only way to boost your retirement savings. You can make additional contributions – both before and after tax. There are incentives for low income earners to top up their super. There are potential benefits for contributing to a lower earning spouse’s super. And you might even be able to claim a tax deduction on certain super contributions.

Here’s a quick breakdown of super contributions – types, limits and benefits.
it’s never too early to start thinking about retirement – here are some quick links to help get you started.
Find out how much you might need in retirement with AMP’s Retirement needs calculator.

1. The Association of Superannuation Funds of Australia. Retirement Standard. June quarter 2021.

Source: AMP November 2021

Important:
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