Many in that situation opt to only contribute the amount required to get the maximum Government tax credit (and some don’t even do that). But in this year’s Budget that tax credit was halved, meaning you’ll get a maximum of $260.72 from the Government provided you contribute at least $1042.86/year (and earn under $180,000).
While that further waters down the appeal for the self-employed – in fairness it’s still a 25% return and even before that change if that was all you were saving for retirement, you’d likely fall short of what you need.
A report from the Retirement Commission last year suggested the Government increase its contribution for those who don’t benefit from employer-matching – but I wouldn’t hold your breath, especially when time is of the essence.
So, if you’re self-employed, what should you be doing with your KiwiSaver to ensure you’re on track for retirement?
Start with some number crunching
I know, I know, “figure out how much you’ll need” sounds like tired advice. But it can be difficult to prioritise money going anywhere except into your bank account to fund your current existence unless you have a clear idea of why directing it elsewhere is essential.
That starts with figuring out how much you might need in retirement and what you’re currently on track to have. Websites like Sorted have brilliant calculators that can help you establish how much you’d have each week in retirement based on your current KiwiSaver settings – a number that might provide a wake-up call.
Consider the best strategy for contributing
One of the biggest challenges when you’re self-employed is managing income fluctuations. Some months are killer, some are anaemic – and it’s tricky to manage even just your regular fixed costs amid those ups and downs, let alone KiwiSaver.
It’s therefore worth considering how to make it work for your situation – to ensure it happens. For example, you could contribute a percentage of every invoice, so when times are lean less goes in, and vice versa.
You could align payments based on the seasonality of your income or contribute a percentage of your profits when you do your GST (if GST registered) to ensure they happen.
You could do a lump sum before the annual KiwiSaver balance date of June 30, but often big dollops of money are harder to find than smaller, regular amounts. Whichever method you choose, double check before June 30 that – at the absolute minimum – you’ll qualify for the maximum Government tax credit.
Review your fund type
I’m beating a familiar drum here, I know – but I still come across people in their 40s who have perplexingly chosen “conservative” funds, when they have decades before they can access their KiwiSaver, and are potentially missing out on significant returns. Don’t make the same mistake.
Consider a company structure
I’ll preface this point by saying: get good accounting advice, as there are many things to consider here aside from just your KiwiSaver.
But to get you thinking – if you’re operating as a sole trader, you and the business are one and the same, whereas if you form a company, the business is a separate legal entity.
If you only take drawings from that company, as many business owners do, anything you put into KiwiSaver will be considered a drawing and taxed accordingly.
However, if you pay yourself a PAYE salary as an employee of your company, the company contributes the “employer” side of your KiwiSaver contributions, which becomes a tax-deductible business expense (noting here that employers pay an Employment Superannuation Contribution Tax based on the employee’s tax rate, reducing the amount that goes into the employee’s account).
This isn’t about avoiding tax but using legitimate structures to ensure you utilise a system that is currently not designed well for anyone who isn’t an employee. But I repeat – take professional advice.
Can you sell your business?
KiwiSaver may not make up the entirety of your retirement nest egg even if you are an employee, benefiting from employer contributions, but the case for diversification goes double for those in business and contributing less – and your business could be one of those irons on the fire.
For many small business owners, however, you are the business – and as soon as you’re not working in it, it ceases to make money or be worth anything.
But some could grow their business into something that has a life beyond their working years, and therefore potentially have some realisable value. I’m peppering in “some” “could” and “potentially” because it isn’t necessarily easy. It involves succession planning, investing in business assets, systems, IP, keeping personal costs separate, maximising profit, perhaps vendor financing. In short, it’s not a small task, but if you have enough time and energy, there’s potential.
Just don’t make it your only plan – business cycles can disrupt even the best-laid plans – which is why including KiwiSaver in your retirement planning mix is still worth considering.
