For most people, superannuation is a payment made regularly by your employer into a fund that can be accessed once you have retired.
Superannuation for self-employed people is different, because you are responsible for your own superannuation arrangements.
Your superannuation account is designed to be a nest egg for when you reach retirement. The more money you have saved in your super fund by retirement, the more financially comfortable your retirement will likely be.
Do self-employed Australians need to pay themselves super?
Under Australian law, all employees of companies and organisations much be paid a superannuation contribution, currently at a minimum rate of 9.5 per cent of their total income, and set to increase in the future. Many Australians make additional contributions to help ensure their super balance will be adequate for their planned retirement lifestyle.
Self-employed Australians, however, don’t have an external employer to rely on for super contributions. If you are self-employed, saving for your retirement becomes your own responsibility.
Some self-employed Australians choose to forgo superannuation and manage their own savings to ensure they have sufficient funds available for their retirement. Others, though, prefer to make superannuation contributions into a super fund of their choice over the course of their self-employed careers. While this does mean some of their savings are locked away until retirement, this option can lead to tax benefits.
Why some self-employed people avoid superannuation
Some self-employed Australians prefer not to participate in superannuation, and instead choose to manage their own savings. By avoiding self-employed superannuation, some people hope to maximise their take-home pay.
The risk of this approach is that you may not have adequate savings available when you retire. Also, you miss the opportunity to take advantage of the tax benefits of superannuation – money in a super fund is taxed differently to money in a savings account, and you may also receive tax deductions based on the super contributions you make each year.
Superannuation for self-employed Australians and tax benefits
As of 1 July 2017, Australians who make personal contributions to their super may be able to claim a full tax deduction. These can be quite beneficial to self-employed Australians, who may be taxed large amounts on their income. That being said, it’s important to be aware of the contribution limit for the year in question, as exceeding the limit could attract extra tax.
Additionally, you might be eligible for super co-contribution payments, whereby the government will match your after-tax voluntary superannuation contribution up to a certain limit, if you have not claimed your contribution as a tax limit. This scheme helps low to middle-income earners boost their retirement savings.
If you are planning on contributing to a super fund, ensure your super fund has been notified of your tax file number. Failure to do this could result in your contributions being taxed at a higher rate, and your personal contributions could also be rejected.
It’s important to note that all contributions must be made by 30 June for them to be eligible to claim as tax deductions for that financial year.
Choosing a super fund if you’re self-employed
Your super fund will likely have a major impact on your quality of life and financial situation during your retirement, so doing your homework and conducting comparisons prior to choosing your super fund is advised.
Make sure to check out RateCity’s comprehensive super fund comparison tool, which can help you find a super fund suitable for your circumstances and savings goals.
While a super fund’s past performance is no guarantee of future performance, it can help provide a guideline of what you can expect from a super fund.
It’s also important to look at the features offered by a super fund, as well as the fees and charges involved, to help ensure you enjoy value for money, especially if your self-employed income may not always be consistent.
For more specific advice, you can contact a superannuation expert, who can help review your super goals and discuss your retirement savings plans.