Life can be tough. After a working life dedicated to building a viable business, many entrepreneurs face a lean retirement. Indeed, government figures show that owners of small to medium enterprises (SMEs) often have a super nest egg about half that of employed workers. Worse still, a recent RSM Bird Cameron survey confirmed four in 10 SME owners have no super at all. The good news is that it’s never too late to start building a nest egg, and with a few straightforward strategies it’s possible for entrepreneurs to reap the fruits of their labour.
NAB Financial Planning Head Iain Rogers believes that the dynamics surrounding the whole issue of retirement planning for SME owners changed radically with the introduction of the new super regime last July.
“Payouts from super are now generally tax-free for the over 60s and that makes it important to take advantage of the superannuation environment,” he says.
For business owners who are behind the eight-ball, Rogers says two considerations are crucial: the first is maximising the time left to contribute to super prior to retirement, closely followed by having everything in place to maximise the sale of the business asset.
In terms of building a super nest egg, part of the problem faced by SME owners is finding the cash to make those all-important contributions. Entrepreneurs typically reinvest their profits back into the business, or use any excess cash to reduce their home loan. But Rogers says many people are may be better off steering surplus cash into super, and under the new regime it is wise to make those contributions on a regular basis. The trade-off for super’s tax-free status post-60 is strict limits on annual contributions – something Rogers believes SME owners heed.
“There is a $150,000 annual limit on non-concessional (after tax) contributions as well as the $50,000 annual concessional cap,” he says, pointing out that the limits have put an end to the “old strategy of making a last-minute dash into super”.
While the appropriate strategy for building a retirement pool depends on individual circumstances, Rogers says an increasing number of people are better off taking advantage of the annual contributions to super and delaying some capital repayment of debt for a number of years.
“SME owners can then pull the money out of super – tax-free – once they have retired, and use it to extinguish their debts,” he says. “For many people this can be a very valid way to take advantage of the new super laws.”
Even for those with minimal super, there are other strategies available to boost their nest eggs. One of these is the recently clarified option for self-managed super funds to effectively ‘gear’ to invest. Rogers elaborates on the new rule, saying: “Many small business owners use self-managed super funds for the flexibility they provide. The decision to allow super funds to use gearing through instalment warrants is a huge bonus for all SME owners.”
Instalment warrants are effectively an agreement that enables the fund to purchase an asset over time. The fund makes an initial part-payment and then pays the remaining instalment(s) plus interest. While the Tax Office has imposed strict conditions on the use of instalment warrants by self-managed super funds, Rogers describes the initiative as a real plus.
“SME owners were often frustrated by the need to get money into super, but once it was there they weren’t able to ‘gear’ – or supercharge – their money,” he says.
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