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Are you paying enough Superannuation for yourself?
I had an interesting conversation with a photographer recently. We were discussing their plans to gradually build their business and the importance of compensating for the quiet times in business by making sure they put money away from their busy season. It is a standard budgeting consideration. “What about the biggest quiet time… when you no longer work? What do you have in place for your future? What are you doing with your Super?” I asked.
I was met with silence.
After a while, the reply was, “I don’t really have any Super.”
“I don’t really have any Super.”
“I guess I have a few thousand dollars in an old fund, but I haven’t put anything into it for a long time.”
So I started asking around my friends in the industry. The most common response was along the lines of, “I do have a Super fund with bugger-all in it… like $12K, I think, from when I used to be employed by someone else.” “I might even have another fund elsewhere..?” “I’m really slack – I don’t contribute to it.” “This is something I’ve ben looking at doing this year, but haven’t yet.” “I put $1,000 in my Super fund every year… that’s enough, isn’t it?”
“I put $1,000 in my Super fund every year… that’s enough, isn’t it?”
No. No, that’s not nearly enough. I have to admit I was pretty surprised at the lack of attention self-employed people give to their future and contributions to their Super fund.
While it is not a requirement for the self-employed to set aside part of their income for Superannuation contributions, we can still take advantage of tax-deductible Super contributions and after-tax (non-concessional) Super contributions. Putting money away for retirement may feel like hiding money from yourself that you can’t use for a very long time. In actual fact, your Superannuation is probably the easiest investment fund you’ll ever have that you can’t cash in and spend until you are at the time in your life you’ll really need it… when you retire.
Quite often small business owners can treat their business as looking after itself without making sure it is also fully looking after us. We really should be looking at what the standard is for employment and structuring our businesses to ensure we treat ourselves as we would be expected to treat an employee. This not only includes paying ourselves a wage or providing money to live on, but also putting away earnings towards taxes, insuring ourselves adequately and contributing to our superannuation fund regularly and as a good portion of our earnings.
We should be paying ourselves as though we are employees.
An average employee should expect 9.5% of gross earnings to be contributed by their employer directly to my Super fund (the Australian Government’s Superannuation Guarantee). This can sometimes be more, depending on your employer. Being self-employed, I am my own employee! Any earnings I intend to take for myself as my pay, I make sure I also take 10% of that from the business and send to my super fund. Paying employee super is a legitimate business expense (ie. an expense that reduces your taxable income).
So how much Super are you putting away for yourself?
Other considerations for your Super fund are the fees charged and the way your money is invested within the fund. A fund with no significant, regular contributions, high fees and poor investments will certainly not be growing to give you backup in older age. You need to give your future-self the best financial support you can, starting as young as you can. It’s never too late to start. Making contributions to the right Super fund will help you plan ahead and give you a nest egg to support you at retirement. The more wealth available over a longer period of time will accumulate a larger nest egg.
The Superannuation calculator on the ASIC-run Money Smart website will give you an idea of where contributing to your Super fund may be of benefit.
As always, you should always seek advice about your own personal circumstances from your accountant or other financial advisors. This article is written from my experience and with my personal opinion.