Hi All,
My new employer will contribute 14% to my super as opposed to the mandated 9.5% as part of my contract.
I am able to take this 4.5% difference as cash if I wish, but that would become subject to income tax.
I am currently 23, don't own a house or car (…yet).
What should I do… given that I'm a long way off retirement!
Cheers
I agree here, keep the money and stick it in savings, or some other investment / house deposit. You can always decide later if you wanna contribute more to your super.
That was my line of thinking… It could mean that I am able to get that first home deposit down faster.
Having not invested alot of money before, I wouldnt say that I'm a seasoned investor or anything. But, I am disciplined and considered in most things.
depending on who you are with they may provide free albeit limited financial advice from an advisor there
Well, if I was you, I will go for contribution to Super. Why???
1. Tax benefits throughout your life (unless Govt. change anything).
a. Contributions are concessionally taxed on way in.
b. Once inside Super earnings are taxed only at 15% instead of your marginal tax rate.
c. If you access it at "right" age income stream is tax free.
2. It is forced savings. So once you set it up you seem to forget it but you will be glad when you are about 55 that you started early.
3. It doesn't impact on your "entitlement" from government if money is in super.
4. You never pay medicare levy or surcharge on your super balance.
Couple of things I will be vary about:
1. Government.
2. Your super provider carefully. Choose carefully, too much fees and not enough growth history.
3. Insurance within super, might be good as you pay pre-tax but consider if you need it and how much and tax implication.
Disclaimer: I aint no financial planner but I am better than "ABC Checkout's Cat". or put it simply I am better than 50%, at 50% of the times.
I agree that government changing things up is the big issue, especially for someone so far away from retirement.
I think it would also depend a lot on your current salary. If you're on a high income (paying high tax), then salary sacrificing into super makes even more sense. But, if you're only paying, overall, about 15% tax now anyway, then maybe better to keep it if you are disciplined enough to invest it yourself.
You are correct for the most part, I will add that for investments made within superannuation any realised gains are also concessionally taxed within superannuation, or are nil if realised under a pension.
Point 3 may not be true depending on your definition of government entitlement. For example a superannuation account is assessed under the assets test for the Centrelink age pension if the person involved has reached age pension age.
Point 4 may not be true should someone withdraw a substantial amount from superannuation before age 60 past the low rate cap.
Depends what your goals are and then it depends on what your earning etc
Work out how much cash you would get at the end of the day if you took it in hand.
You can see whether is worth it or not.
Also find out how frequent your employer contributes into super as well. That may be a factor in making your decision.
Don't salary sacrifice it and save it for short term personal needs.
In future if you have excess cash then consider salary sacrifice in super.
depends on the contract but I'm pretty sure you are unable to take any of the 14% they have contributed
u can if you want make co-contributions, but at your age prolly not
did you get a job for the government? they usually have super around 14-15%
if its a small company, you may be able to negotiate and get they to give you the 4.5% but if its a large company, its set contracts
depends on his income and his "big picture" mentality.
Government will assist low income earners by putting in a contribution of their own if they make personal contributions. I did it when i was younger and have several thousand extra in my super as a result (not including the investment earnings that money will have made since)
What will be your marginal tax rate?
If you are a high earner, then you won't really miss the money and you get substantial tax benefits. And you can just completely forget about retirement planning for a few decades as you are doing above and beyond.
If you are a lower income earner, you may see no tax benefits, or only slim benefits, and you will be more likely to need the money.
Remember it is psychologically easier to go without from the outset than to change later - you won't miss the extra pay if you never get it. Perhaps you could choose the extra super for a while and change later if you need the money?
Whether it is how much deodorant is appropriate, or the important things to consider when making investment decisions (no one else here seems to have picked up on the importance of the OP's current tax rate when making a decision if salary sacrificing into super is appropriate or not), I find myself agreeing with a lot of comments you've posted recently.
If you ever find yourself in Melbourne, let me buy you a coffee :)
Thanks mooboy!
Remember it is psychologically easier to go without from the outset than to change later - you won't miss the extra pay if you never get it.
For me, this is the key. Try doing without the extra 4.5% from the outset. Chances are you'll never miss it and your 55(65? 75?)-year-old self will thank you.
I'm not sure about a lot of the comments on here. It's never too early to start saving for retirement and super is a good enough way to go about that. Pump money in while you don't have a mortgage and kids (assuming you don't) and you'll be able to ease off later if needs be.
Thanks for this advice, fairly sound logic.
I fall within one of the higher tax brackets so I guess this makes the most sense :)
Looooong way to retirement/preservation age. Take the cash, save it, use it, invest it. Look into saving more into super when you are around 20-25 years to retirement.
What ever you do OP - I commend you on taking enough interest in super asking the question.
Most people around your age are fairly apathetic about the subject- my self included until i started working in the industry.
At least until they learn theres provisions in which you can take super out before retirement.
Keep the super contribution to minimum compulsory. Take money pay tax, use remaining money wisely. Enjoy.
Ask 40-years-from-now you. If you squander it, you will regret it.
If you invest it long term, you'll regret it (you'll have missed tax concessions).
The only way you're better off taking the $ is if you invest it in a non-tax-deductible investment, and the only one I know of is a principle place of residence.
If you have any non-tax-deductible debt (mortgage, personal loans, credit cards) it's probably wise to knock them off first.
If you can afford to look after future you, super is the place to do that.
My advice, take the 4.5% now rather than later. If this is paid as normal time wages, your employer will have to contribute 9.5% super on it as well.
I've never had an employer that didn't pay the super guarantee on sacrificed salary also
If you look at it from a mathematical way, I think keeping it in super is a great idea.
Take for example, if your income was $50,000 (the higher the salary, the more sense to sacrifice this btw)your tax bill will look like this:
0 - $18200 = $0 tax
$18200 - $37000 = 19c per dollar ($3572 in total)
$37001 - $80000 = 32.5c per dollar
When you look at the tiered structure, you are effectively paying 32.5% tax for every dollar you earn over $37k. Sure, your effective tax rate is probably a lot lower. $50000 would only incur a total tax figure of $7977 (approx 16% tax) but since most people are expected to make more than 37k a year and would therefore already pay the minimum $3572 in tax (I'm referring to full time workers) - your efforts beyond that point are taxed at 32.5% per dollar.
Holding on to that thought, if we assume that you continue to hold onto a job that pays you more than 37k a year, your employer arrangements means that you effectively earn 17.5% immediately on every dollar placed into super. And even if you could get the cash without paying tax and invest yourself, the extra income earned on that money is again taxed 17.5% higher than within super.
So, you may think, what's the big deal.
Well, when you factor in these 2 tax incentives given to you. The amount you have to earn on the investment should you take it out instead has to outperform significantly in order to break even with super.
Again, in maths terms. If we assume inflation is nonexistent and that you "manage" to find an investment outside of super that can consistently outperform your super by 2% per year…say 3% return versus 1%. When you factor in the effects of tax (remember the 3% is subject to an extra 17.5%) - it'll take you approximately 15years for you to earn the original 17.5% saving should you had put it in super instead.
I should note too, if your salary hits into the next tax bracket as you get older; that tax advantage between super and outside super would increase even further.
On the flip side though, you take the money now; there's no rules in what you could do with it.
Super…the rules never stop changing
These are my personal thoughts.
I'm not an advisor by the way, and it's not a bad idea to speak to one either :)
Being 23 myself, I'd take the cash, enjoy it while young. Remember, it'll be locked into Super for at least another 40 years, but most likely 50 years due to government regulation changes. A lot can change in a number of years, imagine what will change for you in the next 50?
Also; think about the alternative investment opportunities you will miss out on because of that locked away cash - do you trust yourself with your money, or would you feel more comfortable with someone else doing the investing for you?