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Written by Peter Stanhope
on June 01, 2018

Most self-employed people treat their super like it’s the parent of a toddler throwing a giant tantrum in public...They avoid contact at all costs or shoot disgusted death stares at it.

 

But not you.

You’re here because you’re interested in discovering how to sort out your super, so you don’t have to worry about money when you’re old.

 

1. Really though, what is superannuation?

Super is the government's way of trying to make sure that you actually save for your retirement. They don’t want you to rely solely on your pension, too afraid to turn on the heater in winter because it’ll eat up those few crumbs of fortnightly payout.

When you’re working for an employer, your super is taken care of. The government makes your boss shave 9.5% off your wage to pop it into your superfund.

But when you’re self-employed the government currently doesn’t require you to pay any super.

This is because the gig economy is still a relatively fresh concept for old-school institutions like the government. They haven’t fully fashioned onto the drastic rise in startups, small businesses, and people working for themselves.

And if they are aware of it, they’re as slow as a bureaucrat on a Friday when it comes to implementing a relevant compulsory super contribution strategy for self-employed people.

Before your blood pressure starts rising at the thought of having to contribute to super, think about what that blood pressure will look like when you’re old and living day to day, worry to worry your entire retired life because you skipped out on super.

Let’s be realistic - when it comes to your retirement, chances are you’ll be better off having more money in your super. Because dollars in the bank means you call the shots.

That’s the power of superannuation, it’s not just a number; it’s a way of living.

And it’s also the easiest way to reduce your tax now, while keeping more of your hard-earned bucks in the long-term.

 

2. How to reduce tax using super?

Despite sounding less exciting than an accountant’s Christmas party, superannuation is actually one of your greatest weapons in wealth-building.

It might even win you brownie points at dinner parties when you reveal to your friends how you legally skim a significant portion of your tax using super.

(You can already see them leaning in with intrigue, right?)

Because here’s the thing: while the top tax rate for individuals is 47% (including the Medicare levy), you’ll only pay 15% on the money that goes into your superannuation.

Even if you’re not in the highest tax bracket, let’s consider this for a moment, because you’re still probably paying more tax than you need to be, since voluntarily contribution to super can generally be claimed as a tax deduction (up to the annual contribution caps of $25,000 per year).


Here’s an example:

Let’s say Sophie, 37, owns an online store and earns an average of $78,000 a year. She’s in the tax bracket where she pays 32.5% on a majority of that income.

Sophie crunches a few figures and realises she can annually put aside $7,410 - or 9.5% of her income - into her super ($617.50 monthly).

This means $7,410 of her earnings are getting taxed at only 15%, instead of 32.5%. Plus she’s setting herself up for a cushier retirement.

 

Now let’s see what this look like in terms of Sophie’s super (all figures are presented in today’s dollars): 

 
  Outside Super Inside Super Difference
Tax paid in year 1 $2,436 $1,117 $1,319
Tax paid up to retirement (67yo) $72,567 $27,661 $44,906
Savings at retirement (67yo) $177,126 $262,720  $85,593

Click here to read the disclaimer


So to recap…

She puts away, like most people, 9.5% of her annual income into super.

She pays less tax now.

She boosts her nest egg.

And she kicks some serious financial goals.

 

3. That’s all good, but when can I get my super money?

Well...that’s the thing.

The government is giving you such a killer tax cut, because they want you to save for the future. For your retirement.

So the money that goes into your super gets ‘locked away in your super’ ready for access when you hit what’s called ‘preservation age’.

Preservation age is a fancy word that determines the minimum age, set by law, that your super must be 'preserved' until. And currently, that’s between 55 and 60, depending on when you were born.

When you reach preservation age, you can access your super as long as you’re permanently retired (or reached 65).

But whether preservation age seems close, or ages away, don’t let that ‘lack of access’ deter you.

Instead, consider how your money invested through super today will be fuelled by the power of compounding interest.

 

4. What are compounding returns?

Albert Einstein referred to the effects of compounding interest as ‘one of the wonders of the world’. And despite sounding as complex as Google’s algorithms, it’s actually really straight forward.

If you invest $100 in an account that pays 5% fixed term interest a year, after a year you’ll earn $5 - giving you a total of $105.

If you keep those $5 in the account, and reinvest the full $105 in for another year at 5% annual fixed term interest, you’ll have $110.25 after the second year.

Pop the $110.25 in for another year and you’ll have $115.75 after year 3.

By the time you get to the end of year 10, the compounding interest has got you to $162.89.

And if your friend had only started with his $100 when you were already 5 years into your investment, he would only have $127.62 when you’re looking at your $162.89.

Same principle goes for your super.

All else being equal, $1 invested in super when you’re 30, will be worth $20 when you retire. If you wait just 10 years till you’re 40, that same dollar will be worth just $15 by the time you hang up your boots.


So the sooner you start, the sooner you can begin to turbocharge your retirement savings - and pay less tax in the process.

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Example disclaimer

These results are for illustrative purposes only and do not represent actual or expected returns that any particular investor might experience.

The projections are based on a number of assumptions, including but not limited to the following:

  • For both the super and non-super investment products an annual return of:
    • 2.37% capital gain
    • 4.88% income
    • 0.56% franking.
  • Tax rates on income and capital gains both inside and outside super remaining constant which may not occur.
  • A steady inflation rate of 2.5% which may not occur.

The prospective financial information provided is not a reliable indicator of future performance in that it is predictive in nature and may be affected by inaccurate assumptions, unknown risks and other uncertainties. Therefore, the prospective financial information may differ materially from the results ultimately achieved.

The above comparison in no way constitutes advice to invest in any particular investment product and we recommend you seek independent financial advice before deciding whether investing in super or non-super products is right for you.