Should you salary sacrifice? Delving deeper into super
In Episode 4 with Jak we broke down the basics of Super: Why we should care about it now, the difference between each type of fund and the importance of consolidating your super. However superannuation is such a complex yet important topic and we decided there was definitely still more questions to be asked. So we visited Mike Tynan, an Investment Adviser from Morgans Tynan Partners to delve deeper into this topic.
Super Investment Options
Your super fund investments your money that you put into your account, often which you can choose the level of risk. Investment options are essentially distinguished as aggressive, balanced and conservative.
It all comes down to the split between growth and income assets. The higher allocation to growth assets (e.g. property and shares) the more aggressive the investment option because the more risk you’re taking on. This means aggressive strategies have much more elevated risk, however with that risk comes a much greater possibility of higher returns. A conservative strategy seeks to preserve an investment portfolio's value by investing in lower risk securities. However with this comes less opportunity for performance. A balanced investment options is somewhere in between, aiming for reasonable returns but less than growth funds to reduce risk.
Generally, what investment option is best for millennials? When should you look at taking a more conservative approach?
As a preface, everyone’s risk profile is unique to that person. However generally speaking, a millennial should look to be investing more aggressively. Why? Because time is on your side. You have many years of accumulating wealth and stable income ahead of you. You have the opportunity to capture high returns over the long term which is then leveraged over many years through compounding.
When you stop working and have a finite amount of money to live off (i.e. retired or nearing retirement), that’s when you should look to be a bit more conservative with your investments.
If you haven’t looked into investment options, what is the default choice by your fund usually?
Typically, when joining a retail or industry fund (refer to Ep 4 for details on each fund type), the default investment option is Balanced. However, the term balanced can be misleading as to the exact proportion of ‘risky’ versus ‘defensive’ investments so it’s important to read the product disclosure statement to ensure this option is right for you.
What are ‘ethical’ investment options? Are these becoming more popular?
Ethical investments take into account environmental and social factors alongside trying to achieve a competitive return. They are definitely becoming more popular, especially as us millenials and newer gens become more attune to the environment and corporate social responsibility. Mike gave us the example that some people don’t like coal companies while others avoid plastic packaging manufacturers. It often means different criteria to different people so it takes a bit of research to find the right investment mandate to suit you.
How can you choose your own investment options? Which funds allow this?
Most of the big funds give you the option to choose between or a combination of the various different options and it’s usually as simple as logging onto your super and ticking the box. From there the fund and all future contributions will be invested in this new option. Otherwise you can give your super fund a call and chat to them about investment options.
What are some other tips to grow your super faster?
Quite simply, to grow your super faster, a higher allocation to growth investments is required, as well as undertaking salary sacrificing. So let us go straight into that now:
What is Salary Sacrificing?
The whole idea is using your salary in a more tax effective way. It’s essentially exactly like the name sounds, letting you sacrifice a small part of your salary to pay for goods or services or to contribute extra into super. Now this happens in pre-tax dollars, so it also helps to reduce your taxable income which reduces your tax bill.
How does salary sacrifice work?
Firstly you need to speak to your employer and come to an agreement about what you’d like to salary sacrifice. While there’s no restriction on what can be sacrificed, the benefits fall into three categories: fringe benefits (e.g. a car or school fees), exempt benefits (e.g. a work computer) and lastly super contributions. To know if it’s an option, just ask your employer.
What rate is salary sacrificed super contributions taxed at?
When sacrificing some of your pre-tax salary into your super fund, you get taxed at a rate of 15%. For most people this will be much lower than your marginal tax rate which makes it appealing particularly for higher income earners.
What is the total you can contribute to your super?
There is a cap on the amount of super you can contribute to be taxed at the lower rate. From 1 July 2017, the amount of concessional (before-tax) contributions that you can make is limited to $25,000 per financial year. This includes your employer’s 9.5% guarantee. It’s important not to breach that limit as penalties apply.
All in all, what are the pros and cons of a super salary sacrifice?
It essentially allows you to contribute to super in pre-tax dollars at a tax rate of 15% which for most professionals is lower than the marginal tax rate which can be as high as 45%. Jak also gave a scenario in our first super episode about the difference even just small salary sacrifices and higher growth portfolios can make on your retirement lifestyle.
But you have to be certain of your cash flow and the ability to fund your lifestyle on a lower salary. Once you’ve sacrificed your funds into the super environment, it can’t be used until retirement.
If you salary sacrifice, can this take you to a lower tax bracket? How is the best way to work this out?
It sure can. For example, say you earn $100,000 a year and wants to buy a new work-related car, worth $25,000. If you enter a salary sacrifice agreement with your employer, the $25,000 for the car would be taken out of your pre-tax income, putting you in the lower tax bracket with a $75,000 income and a tax-free car.
So you now know about Super Salary Sacrificing and Aggressive Investment Strategies, what do you know about the First Home Super Saver Scheme?
What is the First Home Super Saver Scheme?
We’ve heard enough times that saving a deposit to buy your first home is a tough task these days. To help us with this, the government introduced a scheme in 2017 to allow first home buyers to save within their super account. Essentially, you can make voluntary contribution of up to $15,000 per year which can then be withdrawn to pay for your deposit on your first home. These contributions can be made by way of salary sacrifice with your employer or if you are self-employed you can claim a tax deduction on personal contributions.
How can you access the money?
The ATO (not your super fund) will decide what counts towards the scheme. The ATO will calculate the amount you have contributed as part of the scheme and the amount of earnings on these contributions. They will then advise your super fund on the amount that can be released when you submit an application to withdraw your deposit. This generally available for all super funds however verify with the ATO that your fund is eligible.
It sounds like a lot of admin, is it worth the hassle?
History has shown that these Australian first home owner initiatives seem great on paper but in reality, the take up is usually quite low. Unfortunately, it’s something that many would find too confusing and most would put it in the too hard basket. But for those keen to get into the housing market, it’s a great option to make your first home owning goal achievable.