Case Study(Superannuation Salary Sacrifice)

Superannuation Salary Sacrifice

John earns $75,000 pa and his tax rate is 30%. He wants to put away an extra $5,000 a year towards his retirement, but he’s not sure whether the tax advantages to be gained from investing in super are worth tying his money up. His other option is to invest outside super.

John has heard about salary sacrifice, a strategy where you ask your employer to take extra money out of your pre-tax salary and contribute it to super. As well as boosting your super, this strategy also reduces your taxable income, so you pay less income tax.

John decides to compare how much he could save by salary sacrificing $5,000 into super, with how much he could save by investing the same amount outside super. For the purposes of this example, we’ve assumed that both investments would provide a return of 7.7% pa.

After 20 years John’s savings could be:
Inside super $97,186
Outside super $64,039

That’s an extra $33,777 if John salary sacrifices into super.

Here’s how it works:

Outside SuperInside Super – Lump Sum RetirementFinancial Benefit
Salary Sacrified$5,000$5,000$0
Return (year 1)$254$327$73
Tax on returnrs (year 1)$86$49$37
Financial Position after year 1$3,468$4,528$1,060
Financial Position after year 10$32,579$45,564$12,985
Financial Position after year 20$64,039$97,816$33,777

This table is for illustrative purposes only and does not represent actual returns. A change in one or more variables and assumptions will produce different results. This is general information only and does not take into account your individual objectives, financial situation or needs. This table illustrates the position after 20 years of taking $5,000 pa of before-tax salary and either salary sacrificing it into super or taking it as cash salary and investing outside of super. It assumes investment earnings of 7.7% pa, after fees and before tax. Super investment earnings and contributions are taxed at 15%. Non-super investment earnings are taxed at a marginal tax rate of 34%. All figures are in today’s dollars, adjusted for inflation of 3% pa.

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