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Just because you’re a contractor doesn’t mean you should forget about building your retirement nest egg.
There’s a lot of upside to being a contractor, but it’s important to keep in mind the benefits you may not be getting to make sure you’re not short changed in retirement. If you’re a contractor, or know someone who is, here’s some food for thought to help spring clean your finances!
Q: Are you a contractor or an employee?
You’re contracted for a set task or project. You submit invoices for the hours you work. If this sounds like you, you may be one of Australia’s 980,000 independent contractors.[i] About 8.5 per cent of Australian workers are employed on this basis.[ii]
Not all contractors are the same and everyone’s situation is different.
If you’re not sure about your exact employment status, you can use the Australian Taxation Office’s Employee/contractor decision tool. Then you can use the Superannuation guarantee eligibility decision tool to work out if you’re entitled to super. Both tools can be accessed at ato.gov.au.
Your classification has important implications for your tax and superannuation. Determining whether an individual contractor is an employee for Superannuation Guarantee purposes is a tax issue for the individual or the entity contracting the individual. It’s a complex area and it’s a good idea to consult a tax adviser.
980,000 – number of independent contractors in Australia 8.5% – percentage of Australians employed as contractors |
Q: What’s the upside to contracting?
Contracting can be a great experience, particularly if you’re after more control over how much you work, or what you’re working on. By forgoing some of the benefits of permanent employees, you can also earn more money.
Similarly, if you’re coming back from a career break or joining the workforce for the first time, securing a contract role can often be easier, and sometimes lead to permanent employment.
Q: That’s great. But what’s the downside?
If you’re sick, you will not get paid sick leave. And when it comes to super you may not have any super contributions made for you.
Employees have superannuation contributions paid into a nominated superannuation fund by their employer. But as an independent contractor you might be on your own. You’re responsible for funding your own super, just as you’re responsible for paying your own tax.
Q: So, why does super matter so much?
When you’re starting to make your way in the workforce, the lack of super may not seem like a big deal. After all, retirement is a fair way off. And you’ve got more money in your back pocket for Friday night. And when you’re younger, it’s easy to think of super as ‘lost money’. You can’t access it now, so it’s out of sight and out of mind.
But as you establish yourself in the workforce and build up a bigger retirement nest egg, your perception of super is likely to change.
If you’re contracting later in your career—for example, after returning from parental leave— or know someone who’s winding back their hours leading up to retirement, like one of your parents, you’ll know all about the importance of super.
Super can be the difference between achieving the lifestyle you want in retirement and needing to rely on the aged pension. Spend too many years as a contractor and you could be playing catch-up if you don’t start making regular super contributions.
Q: How can you build up your super?
You need to think about the best long-term strategies to build your retirement nest egg.
· Make regular contributions from your pre-tax income into your super.
· Take account of government incentives, like co-contributions and spouse contributions.
· Review your investment mix of growth and defensive assets to make sure it reflects your life stage and risk tolerance.
Now is the time to spring into life, take control of your retirement savings, and really own your tomorrow. For more information, call us today.
[i] Australia Bureau of Statistics. (19 April 2013). Media release: Decline in independent contractors.
[ii] Independent Contractors Australia. Independent Contractors: How many (Australia). independentcontractors.net.au
What you need to know
Any advice contained in this article is of a general nature only and does not take into account the objectives, financial situation or needs of any particular person. Therefore, before making any decision, you should consider the appropriateness of the advice with regard to those matters. If you decide to purchase or vary a financial product, your financial planner, our practice, AMP Financial Planning Pty Ltd and other companies within the AMP group will receive fees and other benefits, which will be a dollar amount and/or a percentage of either the premium you pay or the value of your investments. You can ask us for more details.
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