Retirement Planning: A Guide to Super for the Self-Employed

As any self-employed person knows, being your boss comes with its own unique set of advantages and disadvantages. And for most people, the benefits of self-employment far outweigh its drawbacks. One of the perceived benefits is not having to worry about your super. Or is it?

While it’s not compulsory to pay yourself super, you will be glad you did when your retirement comes. As is the reality with planning for your retirement, it is never too early to start. Though it may be tempting to delay this step, this will only work against you. The best thing to do would be just to get started. Read on to learn the things you need to know as a self-employed worker. 

Why Pay Yourself Super?

According to ASFA (the Association of Super Funds Australia), about 20% of self-employed people in Australia have no superannuation at all.

It’s common for sole traders and business owners to hope that the sale of their business and business assets upon retirement will generate sufficient cash flow to fund their retirement. 

If that’s your preference, you can continue doing this, but you’ll be taking a huge risk. It’s always better to plan. Paying yourself super is good for your future. Though you may not feel the need to pay yourself super, your future self may be grateful that you did.

There are advantages to contributing to super:

• You will provide a financial safety net for your retirement.
• You can claim a tax deduction for super contributions.
• Super contributions are taxed at 15%, so you may save tax depending on your situation.
• Depend on your investment choices, super investments usually get better returns than bank savings accounts, so your retirement savings should grow faster.

How to Pay Yourself Super?

So, how do you go about paying yourself super? 

Firstly, you need to decide where to pay your superannuation. You can:

• utilise an existing fund that you have used previously
• open an industry super fund
• open a retail super fund
• or establish a self-managed super fund (SMSF)

All superannuation funds now have an electronic method for contributing your superannuation, making it as quick and easy as online banking. Some bookkeeping software can even calculate your super contributions and pay it into your nominated fund for you.

There are two ways in which you can pay yourself super.

Option 1: If you pay yourself a regular wage, set aside 10% of your pre-tax income to pay into superannuation. This should be contributed into your nominated superannuation fund at least every quarter.

It is important to note that if you are a self-employed person who operates your business under a company structure – you are required to pay yourself the 10% super guarantee.

Option 2: If you pay yourself from the business revenue, you can choose how much you pay yourself, which will depend on your business needs. For example, if your business is running on a tight budget, you can reduce your payments. If your business is doing well, you can increase payments. If you’re in any doubt about how much you should pay yourself, you can always ask for guidance from a financial adviser. They’ll be able to advise you on whether your payments are following your personal and business needs.

How Much to Contribute?

As a guide, you could benchmark your super contributions against those of a typical employee which is 10% of your pre-tax income.

Depending on your eligibility, you can make additional concessional (pre-tax) and non-concessional (after-tax) contributions.

For 2021/2022:

• The concessional contributions cap is $27,500. Your cap may be higher if you did not use the full amount of your cap in earlier years. This is called the carry-forward of unused concessional contributions.
• The non-concessional contributions cap is $110,000. However this may be more for you if you can activate the bring-forward arrangements or even nil if your super equals the balance transfer cap.

As a word of caution, you should be careful not to overpay yourself. Self-employed people are still bound by the same contribution caps as regular employees. You should also check that you are eligible to make additional contributions based on your age and super balance.

Make sure you speak to a professional before making contributions to ensure you apply with ATO legislation and regulations.

Need Help on Your Super as Self-Employed?

As a self-employed person, you are at liberty to choose whether or not to pay yourself super. Many people choose not to, which is fine. But if you’re planning on living a full life and enjoying retirement, paying yourself super now could prove to be beneficial. 

If you are self-employed and in need of help and guidance from a financial adviser on the Central Coast, we can help you. Central Coast Financial Planning Group has several financial advisers who specialise in assisting self-employed to make sound financial decisions for both you and your business. We understand that financial planning can be complicated and confusing. Our goal is to make it easier to understand and handle. Book a meeting online today!

Disclaimer: The views expressed in this publication are solely those of the author; they are not reflective or indicative of RI Advice Group’s position and are not to be attributed to RI Advice Group. They cannot be reproduced in any form without the express written consent of the author. This information (including taxation) is general in nature and does not consider your individual circumstances or needs. Do not act until you seek professional advice. Newcastle Financial Planning Group, Central Coast Financial Planning Group, Sydney Wealth Advisers, Coastal Advice Port Macquarie and Coastal Advice Ballina Byron are subsidiaries of Coastal Advice Group which is a Corporate Authorised Representative of RI Advice Group Pty Ltd, ABN 23 001 774 125 AFSL 238429.