"Hi Nathan, I'm thinking of upping my super contributions to 15% (so 6% on top of the employer 9%). My partners employer pays her 13% super, and I've been hearing that 9% super is not enough to retire on. I also heard I could reduce my tax this way. What are your thoughts?"
Thanks for your email Sean.
It is great that you are thinking about your superannuation and growing your retirement nest egg - most people just want more money to spend now!
Ultimately adding more money into superannuation will result in more Superannuation at retirement, all other factors being equal - so that's great!
Doing so through Salary Sacrifice is also great as a 'forced savings' method. Often clients of mine who Salary Sacrifice their super comment they don't miss the money, and otherwise would have just spent it.
It also true that contributing into super can reduce your tax. When you add more money into Superannuation by Salary Sacrifice, that is known as making a Concessional Contribution. These are tax deductible to your personal income. The money is still taxed however, at a rate of 15% on the way 'into' your super account.
Philip earns $120,000 a year PLUS Super Guarantee.
He is 35 years old, has $100,000 in Super, and will retire at age 65. .
Looking at a range of scenarios, lets compare if Philip did nothing, upped his contributions to 15% of his salary, or if he just maxed out his contributions ($25,000).
In the case Philip increased his contributions to 15% would save $2,051 in total tax each year (including contributions tax), and have 37% more superannuation at age 65! He would also have $367 less each month in his pay packet.
In the case Philip put the maximum contribution into his super account he would save $3,207 in total tax each year (including contributions tax), and have 57% more superannuation at age 65! He would also have $574 less each month in his pay packet.
But what else could you do with the money.
In each case Philip is saving money on tax, and ends up with more at retirement - however a lower tax bill and a large super balance doesn't mean you are necessarily living your best life!
The real question when looking at whether you add more into your super, is related to what else you are doing or could be doing with the money.
The catch with Superannuation is that once you have contributed it, you can't get it out until you reach preservation age (60 years old for most people) or meet a few other strict conditions of release such as total disability.
Think about what other areas of your life you could put that money towards
Enjoying life more
Raising a family
Investment outside of super to retire before 60
Paying off your mortgage faster
Getting financial advice
These are all very individual choices and the balance between living now and saving for the future is often hard to maintain.
Things to watch out for!
There are a few things you should be careful with when considering Salary Sacrificing into super:
The Cap is $25,000 a year and INCLUDES what your employer gives you. Going over that could result in a nasty tax bill.
Check with payroll that Salary Sacrificing won't also reduce your Super Guarantee. I have seen cases where the employer calculates the amount they would pay for Super Guarantee on the reduced amount after salary sacrifice! Effectively paying the person less!
Make sure your super fund isn't a rip off! Some old funds have huge, expensive fees and even charge contributions fees or commissions on any money you put in.
I hope this helped your decision Sean. If you still aren't sure you can always get advice from a professional licensed financial planner, like us!
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