Advantages and disadvantages of salary sacrificing into super

Question

What are the advantages/disadvantages of salary sacrificing into super and taking advantage of the tax benefit vs getting paid now?

Answer

Salary sacrificing into superannuation is a strategy where you agree with your employer to forego a portion of your salary in exchange for your employer contributing that amount into your super fund. This can be a financially savvy move under the right circumstances, primarily due to its tax advantages.

Advantages of Salary Sacrificing into Super:

Tax Efficiency: Contributions made through salary sacrifice are taxed at a concessional rate of 15%, which is likely lower than your marginal tax rate if you are a middle to high-income earner. For example, if your marginal tax rate is 32.5%, you effectively save 17.5% in tax on the money you contribute to super.

Increased Super Savings: By sacrificing part of your salary into super, you are increasing the amount of savings for your retirement. This can significantly impact the final amount you have accumulated by the time you retire, thanks to the power of compounding interest.

Reduced Taxable Income: Salary sacrificing reduces your taxable income. This can be beneficial if you are trying to lower your tax bracket or reduce the tax payable on your income.

Disadvantages of Salary Sacrificing into Super:

Reduced Take-Home Pay: Since you are diverting part of your salary to super, your take-home pay decreases. This reduction might impact your ability to meet current financial obligations or lifestyle desires.

Liquidity Issues: Money in super is preserved until you meet a condition of release, typically reaching your preservation age and retiring. This means you cannot access these funds to cover immediate or short-term needs.

Caps on Contributions: There are limits to how much you can contribute to your super at the concessional tax rate (currently $27,500 per year, including employer contributions). Exceeding these caps can lead to additional taxes.

Dependence on Future Regulations: Superannuation regulations and tax laws may change over time, potentially affecting the benefits of salary sacrificing strategies you implement today.

When deciding whether to salary sacrifice into super versus receiving more pay now, consider your current financial needs, your tax situation, and your long-term retirement goals. If you are in a higher tax bracket and have sufficient income to meet your current needs, salary sacrificing can be a powerful tool to enhance your future financial security.

For Pearler users, understanding these financial strategies can be crucial in planning for a secure financial future. Pearler’s focus on long-term investing aligns well with the concept of building your super through salary sacrificing, as both strategies are about making smart choices now for a more financially stable future.

You can find out more about this topic here: How Much Super Do I Pay Pre Tax Income

Disclaimer

I am an AI-powered chatbot and not a financial advisor. The information provided is for educational and informational purposes only and should not be considered as financial advice. Investing involves risks, and past performance is not indicative of future results. It is important to conduct thorough research and consider your own financial situation and risk tolerance before making any investment decisions. It is always recommended to consult with a qualified financial advisor or professional before making any investment decisions.

Answer

Hi Anjali,

It’s probably worth spending some time googling this topic for an hour or two so you are fully across it rather than just getting a simplified answer on here which won’t give you the depth of understanding that’s worth having.

Given how important it is and the outcomes it can have, I’d definitely recommend investing the time to figure out what’s going to work better for your situation.

Sorry for the non answer, but that’s the truth.

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SUPERANNUATION

Anjali Patel.

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Dave Gow - Strong Money Australia

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