SuperLife

Many employers now have a “total compensation” approach to remuneration.  Of these, an increasing number let employees choose from a range of flexible compensation options combining cash and benefits.  While the cost to the employer is the same, it leaves employees with varying net amounts, depending on the choices they make.  More importantly, it gives employees the ability to structure their remuneration to suit their needs.

This article looks briefly at three possible situations - one where the employee needs maximum cash in the hand, a second where the employee needs a lot of death, disability and medical insurance and a third where the employee wants to maximise medium to long-term savings.  In all cases, we have assumed a “total compensation” of $100,000 a year.  In each case, there are advantages in the employer adopting a flexible benefits remuneration philosophy.

Case 1 - maximum cash

John and Adam have each just bought a house, and have heavy mortgage commitments.  Each is spending a lot of what is left each month on furnishing and fitting out their new homes.  Both have taken out enough death/disablement insurance privately to cover their mortgages, but can’t afford anything more.  While John chooses to take the maximum compensation as cash, Adam chooses to join the superannuation scheme and salary sacrifice sufficient to provide an insurance benefit knowing that, once his mortgage is paid off, he can then also use the scheme for retirement savings.  The death/disablement insurance premium is $1,000 a year in each case. Table 1 shows their net positions.

Table 1:

While the immediate dollar advantage ($105) is small, the value of the convenience of payroll deduction for benefits should not be underestimated.  Also, Adam’s insurance is likely to be cheaper than John’s because of group-buying privileges saving more.

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Case 2 – high insurance costs

Mary and Anna are similar employees and each have families including three young children.  Each is paying for all the family’s insurances of:

• death/disablement cover for both themselves and their partners;

• disability income cover for both themselves and their partners, and

• medical insurance for the whole family.  

The total premiums are $11,000 a year.  

Mary elects to take her total compensation in cash while Anna chooses to package her pay to include superannuation employee benefits for the gross amount needed to meet the cost of the premiums.  Table 2 shows their positions.

Anna saves $1,149 a year in tax (see below with regard to ACC premiums) by electing the pay + benefits option and arranging with her employer for the insurance benefits to be part of her superannuation arrangements, paid by way of contributions to a “registered superannuation scheme”.  Again, Anna’s insurance is also likely to cost less than Mary’s.

Table 2:

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Case 3 – the serious saver

Jason and his partner are debt free and their children have left home.  They are in the peak saving period of their working lives and looking to build up their retirement savings.  

Jason’s partner earns just about enough for them to meet day to day expenses so that Jason’s pay is needed for discretionary spending and unexpected expenses but will primarily be saved.  Jason’s employer, lets him take his total compensation as cash pay, or a combination of cash pay and superannuation.  They think they can live on the partner’s pay plus the after-tax equivalent of $48,000 of Jason’s “total compensation” i.e. $38,150.

If Jason chooses to take total cash pay, his net pay is $70,450 of which he needs $38,150 to live on and the balance of $32,300 is saved for retirement.

Alternatively, if they choose to have most of Jason’s pay contributed as an employer contribution to a superannuation scheme, they still receive $38,150 to live on but now save a net $34,840.  Here’s how that works.

Let’s assume that Jason chooses direct taxable pay of $48,000 a year.  The whole of the balance ($52,000) is “sacrificed” as the employer’s superannuation contributions.  Because his total income of $100,000 is above $57,600, the progressive ESCT rate is 33%1.

Table 3:

Table 3 shows the alternative position of their options.

By choosing to take part of his “total compensation” as superannuation, Jason’s remuneration (net pay and net employer contributions) will now be $72,990 as opposed to $70,751.  More importantly, Jason can save a net $34,840 as opposed to $32,300.  The extra $2,540 will go long way towards a comfortable retirement.

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Other issues

A number of issues arise:

ACC

Changing taxable pay changes more than just the employee’s income tax liability.  It can also affect student loan repayments and family support payments that are usually based on taxable pay.  There is also an ACC dimension - ACC earner premiums and income benefits are based on taxable pay of up to $110,018 a year.  If, after packaging pay, the employee’s taxable pay is less than $110,018, the earner premiums are less but so too are the income benefits to which an employee may become entitled after a disabling accident.

Disability income insurance

If the employee has disability income insurance based on the original “total compensation” and wishes to retain that cover, an “agreed value” must be arranged with the insurer.  Without an agreed value, maximum disability cover is usually based on taxable pay.

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¹Under the progressive ESCT regime, the rate for ESCT is based on the marginal rate of income tax that applies to the employee’s “last” dollar of remuneration before salary sacrifice plus any employer contributions to super/KiwiSaver.  For someone who has been employed for at least a complete financial year, it is based on remuneration received in the last complete financial year.  For others, it is based on the employer’s estimate of remuneration in the current financial year.