Almost one in four self-employed Australians has no super. So with no guaranteed nest egg, retirement can seem like a precarious prospect for many thousands of small business owners.
Latest figures from The Association of Superannuation Funds of Australia (ASFA) show that in 2013/14, around 21.6 per cent of self-employed Australians had no super, compared to 7.2 per cent of employees.
Average balances for self-employed people – particularly women – tend to be lower across the board. The average employee aged between 55 and 59 is likely to have a super balance of almost $217,530 while a self-employed person of the same age has only around $110,110, according to the data.
So if you’re running your own show, how can you make sure you can afford to retire – without surviving purely on baked beans and bingo?
Why isn’t it a priority?
Charlie Viola, Partner of wealth management at Pitcher Partners, says it’s not surprising that many small business owners haven’t put superannuation at the top of their to-do lists.
“Probably for long periods of time there’s been nothing to compel them to make super contributions, so they’ve tended to focus on the day-to-day, or reinvesting money into the business, and then rely on the sale of their business for their retirement nest egg,” he says.
“While that’s a viable strategy … there’s risk attached to that because they’re banking on that business doing well all the way through until they retire, and on the business actually being saleable.”
Tax benefits available
Mr Viola encourages all self-employed people to have the discipline to make some level of contribution to super, which he says is both a tax-effective savings vehicle, and some insurance against a business that may fail, or be difficult to sell in the future.
Aside from providing an immediate tax deduction, superannuation ensures enforced savings, he says.
Super isn’t compulsory if you’re a sole trader, or a partner in a business.
However the tax office does recommend making regular contributions, which are tax deductible as long as you’re not making more than 10 per cent of your money from an employer.
To be eligible for the deduction, you must fill out a notice of intent form (available from your super fund or the ATO) and send it in to your fund before doing your tax return.
How to choose a super account
Miles Larbey, senior executive leader in financial literary at ASIC, says superannuation is one of life’s biggest financial decisions.
Those choosing a super account should compare fees, a fund’s investment options, long-term performance and insurance inclusions.
ASIC’s MoneySmart website has a superannuation calculator that can help you compare funds, and figure out how much super you’ll have at retirement.
“Whether you have a regular income or not, it’s important to set yourself a goal for how much you will contribute and stick to it,” says Mr Larbey.
“You can make irregular payments into your super fund, as well as regular contributions.”
Mr Larbey says most self-employed people under 50 can make tax-deductible super contributions of up to $30,000 a year. Those over 50 can pay $35,000 until next July when it drops to $25,000.
If you choose to plough more into super, non-concessional super contributions are capped at $180,000 a year dropping to $100,000 a year next year
If you are lucky enough reach $1.6 million in your fund after next July you can’t make more non-concessional contributions..
Self-employed are disadvantaged
Robbie Campo, deputy chief executive of Industry Super Australia, says evidence shows that self-employed people are at a significant disadvantage when it comes to super, particularly if they’ve neglected it for many years.
“It’s very difficult if you leave it until later in your working life to make up for those lost contributions,” she says.
“The magic ingredient of super is the consolidation of very small, regular contributions.”
Ms Campo says if you don’t have super, and need to make up for lost time, it’s worth seeking financial advice.
She says small business owners should pay particular attention to insurances included in super policies, such as income protection insurance.
“For a self-employed person that’s a very important risk that you need to manage.”