The life of a business owner is one that is often romanticized. The prospect of being your own boss and charting your own destiny, choosing your own working hours, managing cash flow and creating something of value out of nothing seems quite exciting for most people.
However, self employment is riddled with lots of challenges. Building a business is extremely hard. While self-employment allows you to set your own earning potential, most of the time, you will find it hard to hit that potential. The biggest issue is the income volatility. It will take you time before you can generate a consistent amount of good income from your business.
The Self Employed Give Superannuation a Wide Berth
A big challenge is in the retirement savings for the self-employed. Few take this route and those that do are performing way below those that are employed. To some extent, this can be understandable. If you are running a full-time business, it is easy to treat the business as your retirement safety net as compared to an employed person who will one day retire from the workforce and be forced to rely on their superannuation contribution. Still, the business environment can be volatile and some businesses may not even last a lifetime. It is be prudent to contribute to a super scheme even if you are self-employed not just for the sake of your retirement but to take advantage of the numerous super incentives that are available for the self-employed.
Of the more than 2 million Aussies who run the show, only about 19% has any superannuation. This is in sharp contrast to the employees where only 8% have no superannuation. While only 19% of the self-employed have superannuation, some 92% of employees contribute to superannuation.
A Disparity in Super Balances
The same contrast continues when it comes to superannuation contributions. Self employed people tend to contribute much less than employees. While the average super balance for a self-employed woman aged between 60 and 64 is $83,000 that of wage and salary earners in the same age group is $175,000. Self employed men in the same age group have an average super balance of $143,000 while male wage earners in the same age group have an average super balance of $283,000. The same trend obtains across all age groups.
So the self-employed aren’t just avoiding superannuation, those that to do tend to save much less than their salaried counterparts. This means that many self-employed people are going to struggle to realize a comfortable retirement unless their businesses perform really well in the future.
The main reason for the low uptake in superannuation by the self-employed is due to the fact that it is not a legal requirement for business owners even though they have to provide a Super Guarantee to their employees. Those that do fail to make regular super contributions in spite of the presence of tax concessions that they can leverage to boost their balances.
Getting onto the Super Ladder
Given that a comfortable retirement requires a lump sum of $545,000 for an individual or $640,00 for a couple, it is a matter of urgency for the self-employed to get themselves on the superannuation train and begin ramping up their savings. There are various strategies that you can use to boost your super if you are self employed.
Know the Super Perks for the Self Employed
As a business owner, there are various superannuation perks and concessions that you can count on to boost your savings that are not available for a salary or wage earner.
For one, based on your type of business, an SMSF is able to own property provided it is related to the business that generates your income. This is a privilege not available to employees that earn a paycheck. If you are running a restaurant, you can own the building that houses your restaurant business out of your SMSF. If in the future you sell your business premises, the profits will stay in the super fund and the capital gains will be taxed at a favourable rate of 10%.
Make Growing Your Superannuation a Priority
It is understandable why many small businesses find it hard to spare some cash for their superannuation. Most likely, you will be running a tight ship and the spare cash generated is re-invested into the business or used to cover your business tax bills.
It is possible, though, to radically change your superannuation fortunes if you make growing your super a priority. That will also require mind shift on how you perceive the future of your business. Most entrepreneurs recline in the comfort that they will eventually sell their business to fund their retirement. However, if you factor in the ups and downs of business and the uncertainty about future business success, it is easy to see why this is not a safe retirement strategy. Superannuation, on the other hand, provides you with an “iron rice bowl” for your retirement. It is a sure thing and more bankable than a future business sale that will be subject to many other external risks. As a self-employed person, you need to start shifting your mind from your business towards a super-oriented retirement planning in order to guarantee your financial future.
It is not just a question of comfortable retirement. Contributing to your super today will also result in tax savings. As a self-employed person, you will be able to claim annual tax deductions when you make concessional super contributions amounting to up to $25,000.
The concessional contributions that you make to your super are taxed at 15% so if the rate is less than your current tax rate, you are going to make huge tax savings while building a nesting egg for the future.
You Don’t Need Much to Have a Super
An SMSF is quite flexible and will work for you even when you are just starting out on building up your savings. You can begin with any amount. What you should watch out for is the annual cost of running the SMSF fund. It shouldn’t be more than 1% of the fund to make the venture worth it. The good thing is that as your SMSF cache grows, the cost of running it gradually shrinks and eventually, it will be more economical than putting your money in other superannuation funds.
If you are self-employed, an SMSF can be quite attractive considering you have the option of buying the property that your business operates on.
A “magical” figure of $200,000 is often floated as the ideal balance required in your superannuation before you can start a self-managed superannuation fund. But this is currently not the case. Even contributors with small balances can get started on an SMSF.
Your super contributions don’t have to be large and you don’t need to make a lump sum payment. As a business owner, it can actually be easier on you since you will have the cash flow to make small regular payments into your SMSF. The power of compounding also means that even small contributions into your SMSF will make a huge difference. So as not to miss out on your super payments, it is advisable to automate the payments into the fund so that you don’t have to wrestle with your will or procrastination.
Are you self employed and aspiring for the super ladder? You can talk to your financial advisor or an accountant Melbourne professional who can advise you on a reasonable amount that you can painlessly contribute into your super fund on a regular basis.