Monday, January 10, 2011

How Much Should I "Salary Sacrifice" into Superannuation?

I'm starting my new job and looking at the contract details. I was a bit surprised that my employer will only pay 9% of my salary (i.e. on top of my stated salary) into superannuation (retirement). That is because public sector employers in Australia normally pay more than that. But they can get away with this for a short-term contract. Usually, at this employer, when the employer pays 17% in, employees are required to pay in 8%. Snork Maiden's employer pays 15.4% and we salary sacrifice $225 every 2 weeks into her super account. The latter is about 7%. So what should I do here? There is a cap of $25,000 per year in super contributions of course, so I can't go beyond that. Should I go for:

1. Zero

2. The same % as Snork Maiden

3. The 8% level

4. Go to the maximum allowed level?

The downside of going to the max is of course that we can't then access those contributions for 14 years at least. The upside is the contributions face a lower rate of taxation - 15% going in instead of my marginal rate of 31.5% this financial year and possibly 38.5% next financial year. When in the fund, rates are also lower than I'd probably pay in the long term and when I retire I could get the money out tax free.

If I was 10 years older, I would for sure choose the maximum contribution level.


As noted in the comments, I might not be able to do salary sacrifice in this position anyway. I'll ask about it tomorrow. I'll also be increasing our automatic savings contributions to non-retirement accounts. I think from $500 per month each to $1,000 per month each.


traineeinvestor said...

It seems like a no-brainer to me - pay in the max subject to being reasonably confident you will not need the money for the 14 years. The tax savings, on payment, during the time it is invested and on withdrawl are just too good to pass up.

Put differently, what kind of additional return will you have to earn on your money outside of your superantuation to compensate for the additional tax?

mOOm said...

If there was no lock up then yes it is a no-brainer. Should I max out Snork Maiden's contributions too? Anyway, I wasn't provided with a form for salary sacrifice and when I checked the HR website it says that fixed term staff will only be allowed to do this on a "case by case basis". I don't plan to make after tax contributions to superannuation at this stage. said...

I also favour putting in the maximum, as under the current rules asset sales within super are exempt from capital gains tax once the fund goes into "pension" mode... so I stick as much as I can into super and invest it in the Vanguard high-growth index fund. I won't sell any of the units until the fund is in pension mode, so I only pay 15% on the annual fund distributions during accumulation phase and (if they don't change the rules) end up with any capital gains in the unit price being tax free.

mOOm said...

It all depends if you the money or not. Like to buy a house or whatever.

mOOm said...

I decided to go with 10% salary sacrifice which doesn't quite bring things up to the cap (and certainly not this financial year). I can't really explain why I did that nice round number...