With the 2020 financial year getting into full swing, it's a good chance to review your financial situation and consider your options. So, how do you know if you should salary sacrifice and where should you start?
What is salary sacrificing?
Salary sacrificing is a part of salary packaging here in Australia, in which employees (i.e. you) can sacrifice a portion of your pre-tax income and divert that money towards other causes such as rent, car payments or superannuation. For the purposes of my analysis, I'm going to focus specifically on salary sacrificing into superannuation, rather than the much broader salary packaging available under many employment arrangements.
While not for everyone, it's worth considering salary sacrificing a portion of your pre-tax income into super to build that retirement nest-egg and put your investments in a tax-sheltered investment vehicle – after all, lower tax means higher real returns.
When is it best to salary sacrifice?
The best way to maximise your benefits from salary sacrificing is to consider your personal tax situation and as a general rule of thumb, the higher your tax bracket, the more after-tax benefit you can derive from salary sacrificing.
However, it's not all fine and dandy with superannuation, particularly when you consider the significant regulatory and liquidity risk that is inherent in this form of investing.
Superannuation is locked away (effectively) until preservation age is reached, which is currently 60 years of age, and only likely to increase as the pension burden increases and Australians live longer.
On the regulatory front, it's very easy to see why governments want to get their hands on super. What better way to fix a budget deficit and score a political win than to tinker with the super system to generate more taxes that go straight to the government purse?
So while salary sacrificing can be a tax-efficient investment vehicle and is well worth considering, it may not be the optimal investment particularly for younger Australians and those on low incomes – particularly given that money is locked up for a long, long time.
However, salary packaging can be worth taking a look as we head into the new financial year to streamline your finances and work out what is the best option to maximise your returns based on your individual circumstances.
Given how daunting it can be to lock up your hard-earned cash for so long, it may also be worth not sacrificing that money and investing after-tax in your personal portfolio, instead.
For mine, the likes of Appen Ltd (ASX: APX) could provide a great growth option while I'm warming to Commonwealth Bank of Australia Ltd (ASX: CBA) as a value option heading into the second half of the year.
