Now that the government has tightened up the amount of money you can get into super via concessionally-taxed contributions, fresh strategies are called for to ensure you’re well-positioned for retirement.
When you strike out on your own, making regular super contributions can be difficult to justify – especially when retirement is seemingly such a long way away. But, Caleb Dozzi of Brisbane-based dozzi Financial Advice says, failing to budget for super is not just a mistake but a missed opportunity – for all ages.
“A lot of people think super is optional but that’s not looking at the real cost of doing business,” he says. It’s also the most tax-efficient way to build long-term wealth.
Yet, the stats show that if you’re self-employed you’re likely to have an under-baked nest egg come the end of your career. Nearly 10% of the workforce is self-employed, but almost one quarter has no superannuation, and those who do are seriously lagging behind. Only 27% of self-employed people in their 60s have more than $100,000 in super compared with 50% of employees who receive the Superannuation Guarantee (SG).1
You don’t want to be one of the statistics, right? You want to live the dream now and later in life. Here’s five tips to make sure you’re building up your superannuation fund while being your own boss:
1. Make super part of your business plan
Before you start a business, it’s important to model your future cash flows, taking into account estimated business income, expenses, your living costs and whether you can afford super on those projections.
“If you’re not contributing to super from day one, then you need a plan for when and how you will incorporate super into your cash flows in future,” says Dozzi.
If you’re incorporated and employed by your own business you’re required to pay yourself the SG, which is currently 9.5% of your employment income. If you’re a sole trader or partner, it’s optional but that doesn’t mean you shouldn’t.
2. Pay yourself first
When Marisa Wikramanayake was ready to enter the workforce in 2008 it was at the height of the GFC. She couldn’t secure a full-time job, so started to freelance and has been a freelance writer ever since.
“It took a long time to get enough income that was not just sufficient for rent but also to put some aside for savings and super,” she says. It wasn’t until last year that she started to think seriously about super.
“I set up a direct debit of $20 a week. I also set up a direct debit of $100 a month into a high interest savings account,” she says. “After I build that up I’ll probably transfer more into super.”
Dozzi agrees that if you receive regular income the best way to funnel money into your super is to set up a direct debit from your bank account aligned with your pay cycle. Otherwise the temptation is to spend the money on yourself or your business.
If your income is lumpy or irregular, you might prefer to transfer part of each payment into super. Alternatively, you can transfer it into a separate bank account and tip it into super quarterly or annually.
All that’s left to do then is decide which super investment option best fits your age, risk tolerance and values, and whether to make your contribution before or after-tax.
Failing to budget for super is not just a mistake but a missed opportunity.
3. Maximise personal pre-tax contributions
If you make personal concessional (pre-tax) contributions to your super fund you can generally claim the full amount as a tax deduction. Concessional contributions are subject to an annual cap of $25,000, with additional tax applying to amounts above the cap. It’s important to note that to be eligible to claim a tax-deduction, you must have first submitted a valid deduction notice to your super fund within required timeframes, and had it acknowledged by your fund in writing.
While contributions tax of 15% (in most cases) will be deducted, the difference between that and your marginal tax rate is your effective risk-free return before you factor in the return on your investments inside super. Say you earn $80,000 a year, which puts you on a marginal tax rate of 32.5c in the dollar. You receive a risk-free return of 17.5c on every dollar of concessional contributions you put into super.
The flip side is that people on lower incomes with an effective tax rate of less than 15% receive no tax benefit from concessional contributions. To counteract this, people earning less than $37,000 may be eligible for a contribution to super up to a cap of $500 under the government’s Low-Income Superannuation Tax Offset scheme.
Even so, some low-income earners may be better off making a non-concessional contribution.
4. When after-tax contributions make sense
Wikramanayake soon realised she would be better off putting her $20 a week into super as a non-concessional contribution. These are after-tax payments up to an annual non-concessional contributions cap of $100,000, or $300,000 in any three-year period2.
Because income tax has already been paid on after tax contributions, contributions tax doesn’t apply. You don’t receive a tax deduction, but non-concessional contributions are still a good way to boost your retirement savings because earnings inside super are taxed at a maximum of 15% rather than your marginal rate.
What’s even better, the government will sweeten the deal with a co-contribution of up to a maximum of $500 for eligible low and middle-income earners. Wikramanayake receives the full $500 which she says more than covers her fund’s management fees.
5. Know your options
You wouldn’t dream of running your business on autopilot, and your super is no different. A recent survey by Investment Trends found that Millennials are not only driving the trend to switch super funds, but they are also more likely to choose a fund with socially aware investment options.3
Even though Wikramanayake’s super balance is still small, she takes an active interest in where it’s invested.
“I go in every quarter and look at my options. I don’t mind a bit of risk; I want to invest in overseas infrastructure and property, and I also want to know my money’s invested in ethical things,” she says.
The reality is that superannuation is a long-term game and you need to start playing early and actively to ensure you have the most rewarding retirement.
1. ‘Self-employed lagging behind in saving for retirement’, ASFA, 21 May 2016, https://www.superannuation.asn.au/media/media-releases/2016/media-release-31-may-2016
2. Your available cap may be reduced if your total superannuation balance exceeds certain thresholds. In order to use the 3 year ‘bring forward’ rule you must be under age 65 any time during the first financial year.
3. Investment Trends 2018 Super Fund Market Sentiment Report.
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