When it comes time to renewing an employment contract, employees who successfully negotiate a base salary ‘plus super’ will maximise their wealth accumulation ahead of retirement.
With superannuation rates on the rise, contract workers now have an opportunity to boost their retirement bank balance – even if it’s 30 years down the track – by negotiating an employment package ‘plus super’.
Whether renegotiating an existing contract, or starting a new position, RSM Financial Services Australia financial adviser Chris Oates says the terms of the package can have a huge impact on an employee or contractor’s take-home income, as well as their super balance.
“Anyone on a base pay ‘plus super’ option will end up with more in their pay packet, as well as more superannuation at the end of the day,” he says.
“From a wealth accumulation point of view, if an employee or contractor is negotiating a contract they should try to do a ‘plus super’ package because if super rates keep going up, their super balance is going to go up as well.”
PayMe Group CEO Maria Lindgren says contractors are paid a contract rate that is inclusive of super so when the superannuation rate increases and if the contract rate remains the same, the taxable rate of pay is reduced.
“For example, if the contract rate is $110 per hour, the taxable hourly rate is $100 plus $10 superannuation,” she says.
“If the superannuation rate increases to 10.5 per cent, as it’s expected to do on 1 July, 2022, the taxable hourly rate will be reduced to $99.50 and the super would be increased to $10.50.
“While this is not much, it soon adds up over a 12-month contract.
“Often for high income earners they need to have their superannuation capped otherwise they exceed the $27,500 threshold for the year.”
Chris says someone with an annual income of $100,000 ‘plus super’ could end up $150,000 to $200,000 better off after 30 years, compared to someone whose salary or contract is inclusive of super.
“That’s a fair whack of money, and if they’re gaining an eight per cent return on their super, in terms of retirement, that could provide up to 10 years’ of extra income,” he says.
“It definitely makes sense for employees and contractors to negotiate a ‘plus super’ package if they can.”
Chris says as super rates increase, small business owners should also ensure they are meeting their super payment obligations to themselves as well as their employees, while sole traders should consider contributing their super even though it’s not required.
“It could be tempting for sole traders to not pay themselves super and go buy that motorbike or boat, but at the end of the day, they are only hurting themselves,” he says.
“From a financial planning point of view, small businesses need to make sure they can come up with that money at the end of the quarter or the end of the financial year.”
Maria says contractors who work as sole traders or through a partnership do not have to pay the super guarantee.
“It is estimated only 20 per cent of sole traders put money into super,” she says.
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For financial advice, speak to the team at RSM Financial Services Australia’s Canberra office.