The Government’s decision over the past week to pause planned increases to the superannuation guarantee (SG) contribution rate is likely to lead to closer focus on voluntarily salary-sacrificed contributions.
Under a bill passed in the Senate with Government amendments, the SG rate will remain at 9.5 per cent for seven years, rising to 10 per cent from July 2021 and then progressively rising to 12 per cent by July 2025.
Expect more individuals to make salary-sacrificed super contributions to try to keep their retirement savings on track despite the delay in increasing the SG rate. This is provided they can afford it and have the savings discipline to instigate a salary-sacrificing strategy.
Of course, making a decision to make salary-sacrificed contributions can be difficult, depending on personal circumstances.
And fund members facing the costs of mortgage repayments, education of their children and general cost-of-living pressures have to decide where saving for retirement fits with in their long list of financial priorities. It can be a tough call.
There are a range of benefits from salary-sacrificing into super, depending upon a member’s circumstances. These include contributions being taxed at 15 per cent rather than marginal tax rates payable on salaries (an advantage for most taxpayers) and earnings within the super fund being concessionally taxed.
And, crucially, a decision to make salary-sacrificed super contributions introduces a savings discipline with members adding to their savings each month. In turn, they benefit from long-term compounding where returns are earned on past returns as well as on the original capital.
It would be timely to gather as much information about salary-sacrificed contributions and to possibly seek guidance from a financial planner.
In short, the pause in the planned increases in the SG rate places more of the initiative on individuals to take decisive action to better prepare for retirement.
ASIC’s personal finance website, MoneySmart, provides a straightforward guide to salary-sacrificing super and the annual caps on contributions. It is a valuable starting point.
Written by Robin Bowerman, Principal, Market Strategy and Communications at Vanguard Australia.