The road to retirement certainly does look a little different for us all. And the set of circumstances that one fund or family may face may not necessarily be the same situation that another may find themselves in. And it's really this need for flexibility that has led to the development of our six levers methodology.
These six levers have been identified for their significant impact on retirement outcomes. And because we understand not only the effect that each lever has on our end goal, but also how they work together. We can begin to customise a scenario that will work best for your particular fund or family.
Some of the leavers are more obvious and come up more regularly in conversation, like increasing your contribution rates or extending your retirement age. But some are less commonly discussed, and yet are still quite important for the impact that they have on our financial futures. For instance, one of our six leavers centres entirely around the difference between cost to company and pensionable salary.
What’s the difference between pensionable salary and cost to company?
Cost to company is our gross salary before deductions. Pensionable salary is a different number: a percentage of our cost to company, to which our monthly contribution rate is applied.
Now, when it comes to the distinction between these two, and this lever in particular, the answer is quite simple. There’s a right number and a wrong number. If your pensionable salary is defined as anything less than 100% of your cost to company, it’s the wrong number. In other words, if these two measurements aren’t equal, your planning will fall short.
Why it’s important to understand the difference
If we're guided by the wrong beacon, we're bound to land up in the wrong spot. For instance, if your pensionable salary was 80% of your cost to company, it would mean that you're only saving 80% of your intended monthly amount, and you're planning for only 80% of your goal. The last thing that any of us want to hear when we think we've reached a finish line is you have an extra 20% further to go. Legislation also certainly recognises and prompts us even to be planning on this, our most accurate measure of income.
But we find that there are still a large selection of employers that offer the selection of pensionable salary less than 100% of cost to company. And oftentimes we find that with members, especially among our younger generation of savers, they’ll default to the set of options that maximises their take home pay, so, the lowest available contribution rates, the lowest percentage pensionable salary.
The truth is, with the tax deductions that are offered on pension fund contributions, the difference in your take home pay is not all that different. What is different is what's going into your retirement fund. Less seeds in your pot to grow, less magical compound interest, less fruits of your labour.
So, we encourage everyone to know your cost to company, know your pensionable salary, to ensure not only that you're planning on the correct numbers, but also that you're taking full advantage of your tax benefits. Because when it comes to long-term financing, it really is the little things now that make a big difference later.
Now that you have a better understanding of the difference between pensionable salary and cost-to-company and why that matters, watch the rest of the videos in this series to learn about: