Super idea: Expert wants guarantee for Seniorpreneurs
MANY Australians see self-employment as a goal worth aiming for. But running your own show can mean retiring with very little in super savings - one in five self-employed people have no super at all compared to just 8 per cent of employees.
Self-employed women are especially hard hit. Among women aged in their sixties, the average super balance for wage and salary earners is $175,000 - double the average balance of $83,000 for women who run their own business.
Association of Superannuation Funds of Australia is calling for the Superannuation Guarantee, which underpins compulsory employer-paid super contributions, to be extended to include those who work for themselves. With around 1.3 million Australians running their own show, the idea certainly has merit.
However, as any self-employed person will know, it's not always easy finding the money to contribute to super. Spare cash is often re-invested in the business or set aside to cover tax bills. Self-employed people can face uncertain income streams, and it may seem sensible to squirrel money away for those times when income is sporadic or leaner than usual.
Nonetheless, if you work for yourself there are good reasons to contribute to super. For a starters, it offers a source of income in retirement - one that can be more of a sure thing than relying on the sale of your business to fund life after work.
Adding to super can also provide tax savings today. If you're self-employed you can claim an annual tax deduction for up to $25,000 in "concessional" (before-tax) super contributions. Incidentally, this cap now applies across all age groups - a change from previous years when older Australians were able to claim a bigger tax break for super contributions.
Concessional contributions are taxed at 15 per cent within your fund. If this is less than your personal tax rate, adding to your super can be a very tax-friendly way to save for the future. That said, if you are a low to middle income earner, claiming all your super contributions on tax can see you missing out on the government's co-contribution scheme. It's an area where expert advice can help you decide the right blend of before and after-tax contributions.
Super contributions don't have to be large or made via a single lump sum. It can be far easier on your cash flow to make small, regular contributions, and thanks to the power of compounding returns, even modest contributions can make a valuable difference to your final nest egg. An easy way to make growing super effortless is to set up regular, automatic payments to your fund.
If you intend to claim a tax break for contributions to super, be sure let your fund know in writing before you lodge your tax return for the current financial year.
Paul Clitheroe is a founding director of financial planning firm ipac, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.