Sometimes, your regular superannuation contributions just aren't enough. If you find that your compulsory super guarantee is not setting you up to meet your retirement goals, it's time to look at alternative strategies to topping up your account. One such strategy is salary sacrificing.
What is salary sacrificing?
As the name suggests, superannuation salary sacrificing is when you arrange with your employer to divert some of your future, before-tax wages into your super account. In this way, you're foregoing the immediate benefits of your regular pay in favour of the long-term advantages of building up your super.
Since this is an arrangement between you and your employer, you will need to have a formal, written agreement for legal protection. This agreement can stipulate a variety of things, such as when the payments are to be made. You'll want to seek out financial advice before entering into such an agreement.
What are the benefits of salary sacrificing?
Along with acting as a way to force yourself to save money for retirement, salary sacrificing's chief advantage is in the realm of tax.
Salary sacrifice contributions are concessional contributions. This means that when they're deposited into your super, rather than being taxed at your marginal rate, they get taxed at a special rate of 15 percent. Since you'll end up using this eventually, you're essentially saving money in the long run.
Are there any limitations?
There are a few things to keep in mind. For one, since this is a voluntary arrangement, your employer may not agree to the scheme — an unlikely case, but possible nevertheless. However, it might be in their best interests to agree, as salary sacrifices are considered employer contributions under the superannuation rules, and are thus tax-deductible.
At the same time, this leaves your employer entitled to reduce the amount of your compulsory super guarantee entitlements — again, unlikely (particularly if you have a good relationship with your employer), but a possible scenario.
It is also important to remember that your money will be locked away until you satisfy a condition of release (such as retiring after your preservation age).
What rules do I have to keep in mind?
Australian superannuation is known for having many minute conditions and rules, and salary sacrificing is no different.
For one, any such arrangement can only apply to the future income you earn. Therefore you have to set the agreement up before you earn the salary.
Secondly, there is a cap on how much you can put in your fund each year through concessional contributions. According to the Australian Tax Office, you can only contribute up to $30,000 before having your contributions taxed at 31.5 percent. From 2014/15, if you are aged 49 years or over on the last day of the financial year, you can deposit up to $35,000.
Also note that there is an age limit. If you're 65 or older, you need to pass a work test, where you must be gainfully employed for 40 hours or more over 30 consecutive days in the financial year. If you're 75 or older, you can't salary sacrifice at all.
It may seem complicated, but if you find you're eligible, it could be a great way to top up your retirement savings.