In the run-up to retirement, the reality is that self-employed people have around half the superannuation of employees. In fact, ASFA reported only 30 per cent of the self-employed aged 60 to 64 have more than $100,000 in superannuation. This is in stark contrast to almost 60 per cent of employees.
Why the gap?
If you’re a contractor, sole trader or self-employed, then superannuation is just as important for you as it is for regular employees. However, the difference is there’s no compulsory Superannuation Guarantee to ensure the self-employed make regular contributions; it’s up to individuals to decide to voluntarily contribute to super. And as many people who have run a small business can no doubt testify, there always seems to be some pressing need to spend money on business-related expenses rather than your retirement savings.
As the spouse of a sole trader, I can personally relate to this. In our household the ability to contribute to super can change dramatically from one month to the next. However, the desire to live a longand comfortable retirement remains strong.
Who are most at risk?
If you’re nearing or aged over 60, you might be more at risk than those who are younger and self-employed. According to ASFA, the average superannuation account balance for self-employed males in the 60 to 64 age cohort is around $143,000, compared with around $283,000 for male wage and salary earners. For women, the disparity is even starker. The average balance for self-employed women aged 60 to 64 is around $83,000, compared with around $175,000 for wage and salary earners.
Qualifications, occupation and the industry in which you operate also play a significant factor in the gap. According to ASFA those self-employed with a degree qualification tend to have higher superannuation balances.
Of greatest concern are self-employed people in the construction industry (including tradespeople) which has the highest proportion of self-employed with either no superannuation or a balance less than $40,000.
A major factor affecting tradies funding their retirement is that while it’s harder for people in manual jobs to work as long as people who have worked in office based jobs, the government age pension age is slowly increasing from the current age 65.5 towards 67 and possibly even 70. Add to this the fact that tradies may be forced to retire earlier for health reasons, giving them less time to accumulate retirement savings, and longer to spend in retirement, meaning they will require more money to live on.
While it is easy as a self-employed person to put all this to the back of your mind as it’s a long way down the road and there’s plenty to think about right now in running a business and earning a living, the time to act is now.
So, how much super do you need?
As an Education Specialist at Sunsuper, this is the most frequently asked question at our education workshops and unfortunately it’s a question I can’t answer. Ultimately, it comes down to what you dream of doing when you stop working and how much income you’re going to need to achieve that.
Once you've decided on the types of things you’d like to do, Sunsuper’s retirement forecaster can help you work out how long your savings need to last. Use the retirement forecaster.
What should you do now?
Consider making tax-deductible contributions that are at least the equivalent of the compulsory Superannuation Guarantee (SG) contributions you would have received if employed. The SG rate is 9.5 per cent for 2017-18.
Also consider getting professional advice about making regular contributions within the concessional (before tax) and non-concessional (after tax) contribution caps, ensuring you are contributing in the most tax effective way for you and your business. Remember, concessional contributions include personally-deductible contributions by the self-employed. Find out more about contribution caps and rules.
Ideally, begin making these contributions as early as possible in your working life so you won't be left behind.
With tax on concessional (before tax) contributions generally charged at 15 per cent, adding money into super can prove to be a smart strategy to minimise tax and build a nest egg for your retirement. The preferential tax treatment doesn’t stop there. Super is an environment where you generally pay less tax on earnings, and you can usually get better investment returns than a bank savings account.
Plus, your money will be locked away until you retire, and that can be a good thing if you're not so good at saving.
Another case for super that should appeal to the self-employed is that superannuation may provide a means to quarantine some of your personal savings in the event your business suffers a setback. Sometimes we hear small business owners say words to the effect “my business is my super”. But being able to eventually sell a business for what the owner believes it is really worth can be a very different matter – particularly if the business is based on an individual’s personal endeavours.
What could you live without now, to make a difference to your future?
Did you know that if a 35-year-old gave up buying lunch at work each day and instead put the money into their super account it could mean an extra $98,000 in super by the time they retire at 65! It’s small sacrifices like these today that can make a significant difference to the amount in your super in retirement.
So if you, like my husband, are one of more than 2 million self-employed Australians, consider what your own plans are for retirement and start adding more money to your superannuation nest egg.
Remember, it's the small bits that you tuck away now that will make the difference in the long run.
By Ruth Weaver, Education Specialist, Sunsuper
All references to AFSA data or figures have been taken from the following AFSA paper (March 2018) Superannuation balances of the self-employed.
The views of the author and those who provided the responses to the comments posted on the Knowledge Centre are not necessarily the views of the Sunsuper Board. While Sunsuper attempts to make a wide range of information available via the Knowledge Centre it may not cover all the options available to you. We’ve put this information together as general information only and as such it doesn’t take into account your personal financial objectives, situation or needs. You should get professional advice before relying on this information.