The dangers of not paying yourself super as a business owner

Many self-employed people avoid paying themselves superannuation, believing the business will fund their retirement. However, avoiding super delivers not only substantial risks but closes the door on some generous opportunities too.In 2018, the Association of Superannuation Funds of Australia (ASFA) found that 1 in 5 self-employed Australians have absolutely no super (compared with only 8 per cent of employees). There are more factors than you probably realise pertaining to superannuation for the self-employed. To build secure financial foundations for your future, it’s important to weigh them all up before deciding to deny yourself these funds.Risks While it might seem beneficial now to reinvest every cent – including your would-be super contributions – into growing your business, there are many reasons why this strategy can backfire:Your business fails: If you owned the likes of Kodak or Blockbuster Video in their heyday, you may have thought the good times would roll forever, so why would you need super? But technology evolved quickly and their services became irrelevant. You can’t be certain that your business will survive as long as you. Without super to fall back on you’ll be left with nothing to show for your efforts should the worst happen.Your business sells for less than you hoped: Your business might be worth a lot now, but that may not be the case when you want to retire, or need to due to ill health or some other change in circumstances. Again, without super you are left exposed.Your business fails to sell: Planning to sell your business and being able to do so are very different things. There are a lot of reasons why a business may fail to sell – some you can fix, others not. If you have super, you could semi-retire or appoint a general manager to run things for you until you do find a buyer. Without super, you are stuck working for longer.Lost earnings: You may have built up some super before going into business. But under new rules, inactive low-balance super accounts (those with no ingoing contributions) must be wound up. While monies from closed funds can be returned, you’ll lose the earnings they could have built had the account stayed open, plus any insurance policies you had tied to them.Lost opportunities You may already have weighed up the risks of not paying yourself super, but I’d be willing to bet you aren’t even aware of some of the benefits of making those contributions:Business premises: For some business owners, a self-managed super fund (SMSF) can deliver both business and personal benefits. Your SMSF can purchase the property from which the business operates and set the rent it pays. You own an additional asset from the business and the rent ultimately goes back to you instead of some third party. Meanwhile the business can enjoy favourable rental terms, such as price reductions when cash flow is tight. (Be aware, though, that solely investing your super this way still leaves your retirement pinned to the business’s fortunes).Lower tax bills: Self-employed Australians are generally able to claim a deduction for their pre-tax super contributions. Plus, super contributions are only taxed at 15 per cent, whereas most incomes are taxed at a much higher rate. That means your taxable income goes down, even though the money is going to yourself via your super.Co-contributions: If you are deemed to be a low-income earner (many self-employed people earn less than their employees), you could be eligible for government co-contributions. Not only are you saving for retirement, you’re essentially getting free money added to the kitty.Spousal contributions: Depending on your spouse’s income, you could reduce your tax bill by contributing to their super too. Plus, they may then qualify for government co-contributions on top of those payments you make.Compounding effect: Not investing in super in your younger days means you don’t benefit from the compounding effect over your working life. And by depositing funds along the way, you can take advantage of price cycles in various assets (buy low, sell high) to generate better overall returns. Insurance protections: Life, disability, and income protection insurances provide a safety net over your ability to earn a living. You might not bother with them if they had to come out of the household budget. But with super paying for them, you can protect yourself and your family without feeling the pinch.Armed with this new-found knowledge, go back and revisit your decision to not pay yourself super. You might just realise that you’ve unwittingly been putting the brakes on your wealth-building efforts!Note this is general advice only and you should seek advice specific to your circumstances.