Alarming figures from a 2012 Australian Bureau of Statistics report show that almost 25 percent of self-employed workers, including tradespeople and small business owners, have no superannuation.
The same survey found that the average super balance for self-employed is $56,682 compared to an employed person who is likely to have on average $85,600 invested in super. In contrast to employer Super Guarantee contributions, superannuation contributions are not compulsory for the self-employed. As such making a contribution to super is often over-looked with priority instead going to the re-investment of cash flow back into the business.
However if you are self-employed it’s important to remember that by making regular contributions to your superannuation you can take advantage of a range of tax benefits. The sooner you start, the more you can contribute into super and the more you will end up with to fund your retirement lifestyle. The ASFA (Association of Superannuation Funds of Australia) Retirement Standard benchmarks the annual budget needed by Australians to fund either a comfortable or modest standard of living in their post-work years. The most recent national figures show that, in general, a couple looking to achieve a comfortable retirement needs to spend $57,665 a year, while those seeking a ‘modest’ retirement lifestyle need to spend $33,358 a year. For singles, the amounts are $42,158 and $23,175 respectively. With this in mind, it’s important for self-employed people to think about building their superannuation now or risk not having money for retirement.
For some self-employed, their retirement plan consists of relying solely on the sale of their business at retirement – but this comes with risk. Businesses can be difficult to sell and in some cases they do sell for less than you think they are worth. By building a separate pool of assets in preparation for retirement, it takes the pressure off selling the business and can mean there’s a much bigger nest egg to retire on.
Anyone who runs their own business or earns less than 10% of their total income from income paid by an employer is considered to be self-employed for the purposes of superannuation. With this in mind, there are a number of ways that the self-employed can potentially boost their superannuation balances and in some instances receive tax benefits too. For most, the key is to start making some level of contribution, whether big or small. The sooner a regular contribution plan starts the greater boost it can have on your retirement nest egg over time.
Superannuation is an important element of any individual’s financial circumstances – whether you are building wealth or you are retired. As it can be a highly complex area it is vital to know the consequences of any decisions you make especially with regard to the super fund you use, where your money is invested, what insurance you have and who are nominated as your beneficiaries.
We recommend that you talk to a professional adviser if you have any questions about your own super arrangements.