Self-employed workers lack retirement savings

Many self-employed workers run the risk of not having enough savings to enjoy a comfortable lifestyle in retirement, research by the Association of Superannuation Funds of Australia (ASFA) has found.¹

The industry body highlighted that while super was compulsory for most wage and salary earners, it wasn’t for those who were self-employed, and as a result 22% of self-employed workers had no super.²

If it’s something that’s crossed your mind, here’s some info around super for self-employed people, the annual budget amount you’re likely to need in retirement, and what incentives there are to actually make contributions.

How do self-employed workers stack up?

Statistics show³:

Almost 25% of all self-employed workers don’t have any super
Around 75% of self-employed workers, who don’t have a qualification, have little or no super
The average super balance of a 60 to 64 year old self-employed worker is $129,120 while it’s $287,577 for a wage/salary earner.

How much money do I need to retire?

ASFA figures show individuals and couples, around age 65, currently need an annual budget of $42,893 and $58,922 respectively to fund a comfortable lifestyle in retirement, assuming they own their home outright and are in relatively good health.⁴

If you think you don’t need to worry about super in order to fund a comfortable retirement—perhaps you have significant business assets or are relying on your eligibility for the government’s Age Pension—it’s worth crunching the numbers and giving it some thought.

Alone, the Age Pension is unlikely to be enough⁵ and many self-employed Australians may not have large enough business or financial assets to sustain the lifestyle they have become accustomed to.⁶

What are the benefits if I contribute?

For the majority of Australians who earn a wage or salary, their employer will make a compulsory payment of 9.5% of their pay into their super, under what’s called the Superannuation Guarantee.

While self-employed workers are not bound to make super payments under this scheme, there are still incentives to make contributions to a nominated super fund. We’ve listed these benefits below and to learn more about how to make contributions, you can check out the MoneySmart info page.

You may be able to claim a tax deduction

Generally speaking, most self-employed workers (that is, those who don’t earn 10% or more of their income working for an employer), can claim a full tax deduction on any before-tax super contributions they make under age 65, or between 65 and 75 if they meet work test requirements.⁷

This means contributions are taxed at 15%, or 30% for those earning over $300,000, rather than at personal income tax rates, which is the rate of tax applied to your income.⁸

Meanwhile, contributions may attract extra tax if they exceed the concessional contributions limit, which the government is proposing to reduce from next financial year.

The government will match certain contributions

If you earn less than $51,021 per year and make after-tax contributions to super, you may also be eligible for the super co-contribution payment, where the government will match your contribution up to a certain limit, unless you have claimed your contribution as a tax deduction.⁹

CGT relief can work in your favour if you’re a small business owner

When you come to sell your business assets as part of your retirement planning, not only are there capital gains tax (CGT) exemptions for eligible small businesses, certain contributions to your super will not be counted towards your after-tax super contributions cap.¹⁰

What this means is you may be able to contribute an additional amount to super, with the lifetime CGT Cap for small businesses currently $1,415,000 per eligible individual.¹¹