A step-by-step guide to salary sacrificing into super
The COVID-19 Superannuation Early Release Scheme has now seen 3.3 million Australians withdraw funds from their super accounts - with an average amount of $7663.
Depending how far away you are from retirement age, this amount could make a significant dent in your nest egg.
The longer you've got to go until you stop work, the greater the damage due to the loss of compounding returns.
If you did dip into your super, however, there is a way to do some damage control ... salary sacrificing. This means you'll contribute a percentage of your pre-tax salary into your super while you continue to receive the super guarantee employer contributions.
It's an effective way to boost your retirement savings, particularly if you're paying a higher rate of marginal tax (that's anyone earning more than $45,000 a year), because your extra salary contributions will be taxed at the super concessional rate of 15%. It's a win-win: you'll be building up your nest egg while reducing your tax.
Salary sacrificing does involve a reduction in your take-home pay, but the trick is to start small enough so it won't be missed, says Nexia Australia financial adviser Fran Hughes.
Start by contributing as little as the cost of a cup of coffee a day, or around $60 a fortnight, from your pay, which over the years, thanks to the positive power of compounding, will turn into a significant sum.
How to start salary sacrificing
- Ask your pay office to put part of your pre-tax pay into your super account. It's best to do this by email so there is a record of your request.
- You can increase or decrease the amount at any time by notifying your pay office.
- The total amount of concessional super contributions can't exceed $25,000 a year. You can check how close you're getting to the maximum contribution limit by logging into your super account. "Search for the transaction summary commencing July 1 of the financial year, keeping in mind that the maximum amount for concessional contributions is $25,000 per financial year," says Hughes. "Exceeding your annual super contributions cap could potentially leave you with a tax bill, as excess contributions are taxed at the marginal tax rate."
If you're a sole trader, salary sacrificing won't apply to you but you may want to make personal contributions to super to save for your retirement. You may be eligible to receive the government's super co-contribution payment. To find out more information, visit ato.gov.au.