Many business owners refrain from paying themselves superannuation, suggesting the business is their retirement asset. But this simplistic view can actually be a recipe for financial ruin.
As the CEO of SME specialist super fund Nationwide Super, Ian Morante admits he has something of a vested interest in encouraging business owners into superannuation. But working specifically with businesses and having previously worked for many years as a financial adviser, Mr Morante said he has seen more than his share of business leaders wind up in dire straits by foregoing super.
“When things go bad, they can go really bad,” he told My Business.
“Unfortunately, we see some of those negative or risky aspects come to fruition where someone hasn’t had that plan B in place – what happens if plan A is all you’ve got and it goes wrong? Particularly if you’re at a stage in your life where you can’t start again, like you’re too close to retirement.”
A lot of business owners hold the belief that by forgoing paying themselves regular super contributions, they can preserve much-needed working capital and cash flow within the business. By doing so, they can focus on growing the business as their primary asset to fund their retirement.
Indeed, there was a strong rejection of a suggestion to the Senate earlier this year to make super contributions for the self-employed compulsory.
But Mr Morante said there are several flaws in this strategy when life has other ideas.
“Typically, someone in small business will have two main assets, and that will be their home and their business. But both of those assets have typically got a high level of debt… there is a fair bit of risk involved with them,” he explained.
“Having superannuation themselves as an individual means that they have an asset then that is not associated with debt, and is therefore protected from business failure, bankruptcy, and gives them diversification of asset class that they otherwise wouldn’t have invested in.”
Mr Morante said there are many unforeseen factors that can adversely affect the value, and even survivability, of a business. And should these crop up, it can destroy the value that all the years of hard work had created.
“What can happen is someone’s had a fantastic idea for their business, they’ve worked hard at it but there may be factors outside of their control, such as changes in technology or social needs or client attitudes, where all of a sudden a great business model one year in 10 years’ time is no longer required or folds up,” he said.
“So all the work you’ve put in towards that and counting on that for your retirement nest egg has evaporated.
“Also the strain of running your own business over time can lead to breakdowns: divorce, separation, changes in personal or family relationships, and they can have a dramatic impact on the value of a business as well.”
Of course, superannuation is still considered an asset during divorce proceedings, meaning funds aren’t siloed from a spouse.
“But it’s a lot easier to split superannuation in a settlement because, in effect, it’s money sitting in the account, whereas if you’re in a business and you’ve got to try and separate that, it can actually destroy a business,” said Mr Morante.
He noted that family businesses are particularly susceptible to relationship breakdowns, where a couple or family members go their separate ways personally and are effectively left fighting with their business partner, which in turn can cause quality to slip, customers to leave and the value of the business to suffer.
Another little thought-of factor comes down to insurance policies, which can be much cheaper to access through superannuation.
“In joining a fund as an employee themselves, it gives them access to debt, total and permanent disability and income protection insurance if they need it at very competitive premiums,” said Mr Morante.
“When industry funds in particular provide those insurance policies for members, the premiums are negotiated at bulk rates, and so they are a lot cheaper than what you can get as an individual approaching an insurer on your own.
“But it also means the premiums are paid out of your super… it’s not coming out of your day-to-day cash flow.”
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