This week we discuss super for the self-employed. The fact is that you are more likely to have less super than if you were an employee.

Data from the ABS shows that the self-employed have less money put away for retirement.

One of the main reasons is that it isn’t compulsory for the self-employed to put money into super. Meanwhile, all employees have 9.5% of their salary put into their super.

As a result:

  • only 10% of self-employed people made tax deductible contributions to their super in the 2014-15 financial year, and
  • over 60% of business owners have less than $40,000 in their super, with nearly 20% of them having no super at all.

Many business owners treat their business as their only retirement strategy. This is good if it works, but what if you can’t sell it for as much as you think it is worth. Or worse still, what if you can’t sell it at all.

It is important that you have a plan B, and there is no more tax effective way to save for your retirement than superannuation.

The catch is that money contributed into super must stay there until you meet a condition of release. The most common condition of release is reaching retirement age. So, if you contribute into your super fund, you are agreeing to keep the money there until you retire.

To compensate for this, the Government gives generous tax incentives. For example, if your personal tax rate is 37.5%, and you contribute $10,000 into super, you will receive a personal tax deduction of $3,750 and your super fund will only pay $1,500 in tax. Therefore, it has only cost you $6,250 to buy an asset worth $8,500. That’s an immediate, guaranteed return of $2,250 or 36%.

As with all savings, the earlier you start the better. Time really does matter.

Let’s compare two business owners, Chris and Emma, who both expect to work for another 20 years and don’t currently have any super. Chris puts $200 per week into his new low cost industry super fund but Emma doesn’t. Based on average returns of 7% per year and after all taxes and fees Chris will have around $323,000 in super when he retires.

After 10 years Emma decides she should also do something and puts $400 per week into her new super fund. Based on the same returns as Chris, Emma will only have $232,000 in super when she retires.

Finally, the Government allows you to put in up to $25,000 per year and claim the tax incentives. While everyone’s circumstances are different, it is generally a good strategy to contribute as close to this amount as possible.

If you are concerned that you don’t have enough super or would like to discuss your retirement strategies, please contact me on 0417 034252 or visit www.constructwealth.com.au

General Advice Warning
This advice may not be suitable to you because it contains general advice which does not take into consideration any of your personal circumstances. All strategies and information provided are general advice only.