Salary sacrifice falls out of favour as a super strategy

An analysis of data from regulator APRA shows that, while employer super contributions and personal super contributions has more than doubled in the past decade, annual salary sacrifice has grown only 21 per cent in 10 years despite rising wages and worker numbers.

Last financial year, workers injected $9.1bn into their super through salary sacrifice, but this figure is dwarfed by compulsory employer superannuation guarantee (SG) contributions of $120bn and people’s personal super contributions of $55.8bn.

Salary sacrifice is set up through your employer and allows you to pump extra cash into your super – on top of the 12 per cent employer contributions – before income tax is deducted.

Years ago it was the only way most workers could beef up their super voluntarily and claim a tax deduction for it, but rule changes in 2017 allowed all workers to make voluntary concessional (tax-deductible) contributions to super at any time.

Financial planners say this extra flexibility is a key reason why salary sacrifice is not growing as fast as other voluntary contributions.

JBS Financial Strategists chief executive Jenny Brown said other reasons included employees lacking trust in their bosses to make the contributions, and the rising cost of living.

“If you are used to receiving an income and then you salary-sacrifice money into super, you are doing without some of that income and that bites as well,” Ms Brown said.

“Some people are changing jobs and not thinking to re-establish their salary sacrifice.”

Ms Brown said salary sacrifice remained a good strategy but its use depended on people’s circumstances.

She said some of her clients had extra bank accounts set up to save after-tax dollars, then in June each year they would pump it into super to ensure they used up all of their $30,000 annual cap for concessional contributions.

A potential problem for people making voluntary super contributions just once in June is that it is tempting to spend money sitting in a bank account, whereas super is locked away until their 60s.

Financial strategist Theo Marinis said contributing money into super was “easier to do on a regular basis because you don’t have to find the cash”.

“You don’t notice putting it in because it’s coming out regularly, and you don’t have to scramble around to find the money at the end of the financial year,” Mr Marinis said.

“People like making personal contributions before June 30 to get a bigger tax refund, but that means you paid more tax than you needed to during the year.

“I think salary sacrifice is better because you are dollar-cost averaging, getting money in on a regular basis and getting an immediate tax deduction.”

Mr Marinis said some people simply liked a juicy refund at tax time, but the lack of automation in saving for retirement could be a problem.

Perks Private Wealth director Simon Wotherspoon said that, for many people, salary sacrifice was still one of the simplest and most reliable ways to build wealth.

“In practice, most Australians don’t end up with a meaningful cash surplus at the end of the year,” Mr Wotherspoon said.

“Without a system that pays your future self first, the intention to contribute later rarely materialises. So while the rules have modernised, the behavioural side of financial planning hasn’t changed as much.

“People who automate their investment savings, including super contributions, typically accumulate more over time.”

However, the rule change allowing most people to make personal deductible contributions at any time took pressure off payroll departments to manage annual super caps and gave individuals much more flexibility, Mr Wotherspoon said.

He said super remained a popular long-term retirement planning tool despite recent controversies around extra government taxes for people with high balances.

“Super remains one of the most tax-effective structures available in Australia, and the fundamentals haven’t changed: it offers long-term compounding in a concessional tax environment,” he said.

This article first appeared in The Australian as Salary sacrifice falls out of favour as a super strategy