Ask An Advisor

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Buy, Hold, Sell

This week on Equity Mates Investing podcast we handed the controls to Adam Keily, one half of Comedian V Economist, for a special new series on the podcast feed.

Buy, Hold, Sell will roll out every Tuesday over the next 6 weeks with Adam hosting a stellar line up of guests.

The week’s question

“What are the major pros and cons of salary sacrificing schemes to cover things like cars, childcare fees etc?”

- Claire, VIC

This week’s advice

This week’s advisor is Jane Mitchell from Advise Wise.

Here is her response to Claire’s question:

Salary Sacrificing:

Your employer may offer you the opportunity to salary sacrifice part of your wage to help fund your superannuation, or your employer may provide a choice to fund your rent, mortgage payments, childcare fees, amongst others, depending on your Salary Packaging offered to you.

Pros and Cons

Benefits:

• Tax Savings: One of the primary advantages of salary sacrificing is the potential for tax savings. By sacrificing part of your pre-tax salary, you can reduce your taxable income, leading to lower income tax payments. Salary sacrificing into super can offer significant tax benefits, as the sacrificed amount is taxed at the concessional rate of 15%, which is generally lower than your individual's marginal tax rate.

• Building wealth: Making regular contributions into your super from sacrificing a portion of your salary, allows you to build your long-term wealth, averaging the timing of investing into the market and potentially allowing for a more comfortable retirement in the future. 

• Access to investment options: Super provides access to a wide range of investment options that can help diversify your portfolio and potentially generate higher returns, maximising the growth of your retirement savings. 

• Compound interest advantage: Starting to contribute to super at an earlier age allows you to take advantage of the power of compounding, as contributions have more time to grow, potentially resulting in larger retirement savings. 

Things to consider:

• Reduction in cash salary: Salary sacrificing involves forgoing a portion of your salary, which can result in a reduction in your take-home pay. This can impact your immediate financial obligations and may require careful budgeting.

• Superannuation contributions: While salary sacrificing into superannuation can have tax benefits, it is important to consider the impact limiting your ability to access the sacrificed funds until you reach preservation age, which is currently age 60. (born after 30 June 1964). 

It is crucial to carefully consider your current financial obligations as your take home pay is reduced and you can’t access the funds contributed into your super, until at least age 60.

• Impact on certain entitlements: Salary sacrificed amounts may not be considered when calculating certain entitlements such as overtime pay, leave accruals, or other employment benefits. This could potentially reduce the overall value of your employment package.

• Employment dependency: Relying on salary sacrifice for rent, childcare, non-super benefits, could create a dependency on continued employment, as any changes in employment status or income could impact your ability to meet rental obligations.

It's important to consider the long-term implications of salary sacrificing into super and to seek advice from a financial adviser to ensure that your superannuation strategy aligns with your overall financial goals and retirement plans.

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About Jane Mitchell

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