There are several things employees get that freelancers and sole traders don’t. Paid holidays and sick leave are pretty obvious, but it’s easy to overlook superannuation.
Depending on who you listen to, the 9.5% superannuation guarantee combined with a full or part pension may or may not provide a modest to comfortable lifestyle in retirement. But if you are a freelancer or sole trader, it’s down to you to put some of your own money away.
If there is a real prospect of being able to sell your business before you retire, it’s not unreasonable to treat investment in the business as an investment for retirement – especially as it may be exempt from capital gains tax.
However, that’s not the case for many freelancers – you are the business, so there won’t be anything to sell.
Yes, it is hard to put money aside when you aren’t making much from your business. And there are all sorts of other calls on your income at various stages in life: repaying higher education debt, saving for a house deposit, housing costs, children, and so on.
You don’t have to put money into super in order to save for your retirement. Most people who aren’t on low incomes for much of their working lives manage to accumulate significant – though not always substantial – assets outside of super. But generally speaking, super provides a tax-advantaged environment for investment in exchange for locking the money away until you retire or at least approach retirement.
Whether you are using superannuation or saving/investing in some other way, compound interest means that it’s not just how much you save in total that determines the final outcome, it’s also how long you’ve been saving. So we are often advised to start sooner rather than later.
Once you’ve made a decision to put money into super, there’s something to be said for making automatic monthly contributions – ie, paying yourself first. That way there’s less chance that you’ll spend the money on something else.
Then if you are not in a position to make a top-up contribution at the end of the financial year, at least you know you’ve put away the minimum amount you wanted to contribute, and you can adjust the monthly contributions for the coming year if necessary or appropriate.
To deduct or not?
As a freelancer, your superannuation contributions are generally tax deductible. Imagine you make $45,000 in a year and put 10% ($4,500) into super. That reduces your tax bill by 32.5% of $4,500, which is a little short of $1,500. So it only feels like you’ve sacrificed $3,000 rather than $4,500.
But you don’t necessarily want to claim a tax deduction. Lower-income earners may qualify for the super co-contribution, which can mean that putting $1,000 into super without claiming a tax deduction attracts a government contribution of $500. An almost-immediate 50% return is quite an incentive, especially when you consider what that $500 will grow into by the time you retire. This scheme currently tapers off as income rises to around $51,000.
Within limits, you can choose how much or how little of your personal super contributions are tax-deductible, so you might make the first $1,000 from after-tax income in order to claim the co-contribution and the rest from pre-tax income.
It’s time to act
Financial decisions shouldn’t be rushed, but it’s time to stop dragging your feet.
If you’ve decided how much you should be putting into super and which fund you’re going to use, put that plan into action.
If you are still dithering about superannuation, set yourself a deadline for making an appropriate plan and acting on it. Even if you decide you shouldn’t be putting money into super right now, at least you will have considered your options.
A superannuation comparison site such as Canstar or SelectingSuper – there are several others – is a good way to start whittling down the range of available funds, though you shouldn’t rely solely on their ratings.
If you have any money in super, which of your dependents you want to receive it in the event of your death, and in what proportions? Or – perhaps because ‘dependent’ has a specific meaning in this context – should it be paid to your legal personal representative to be treated as part of your estate? A binding nomination lasts for three years and must be followed by the trustee, while a non-binding nomination indicates your wishes but leaves the trustee free to make payments to your estate or to any of your dependants. Use the appropriate nomination form (available from the fund) to advise the trustee of your wishes.