Your superannuation may be your key to business ownership. But first, you need to know the rules of accessing super for a business.
You have dreams of owning your own business.
The challenge is that you don’t currently have the funds needed as start-up capital sitting in your bank account. Instead, you have a superannuation fund that contains what you need.
And that creates another challenge.
You typically can’t access your superannuation until you reach the preservation age of 65. If that’s the case, does that mean you have to wait to start a business with super?
There are ways that you may be able to access your super before you’re 65.
Accessing Super When You’re Below Age 65
There are two main ways to access your super before you turn 65.
The first is if you want to retire and don’t intend to ever return to work. Unfortunately, this isn’t a viable solution if you want to start a business, as that very act still means you’re going to work.
The other option open to you is to use a non-commutable TTR income stream to gain access. TTR stands for “transition to retirement” and it allows limited access to the funds in your super. Typically, you can access between 4% and 10% of the account’s balance per financial year.
The issue here is that you can’t make further contributions to the account once it transitions into a TTR account.
So, the key question now here is can you start a business with super if you only have access to 10% of the fund?
The answer depends on how much money you have in the fund. It’s also important to keep in mind that you will likely need to pay taxes on any withdrawals you make if you take this option.
Interestingly, a third option becomes available when you turn 60.
If you leave your current employment once you turn 60, you will gain access to your super. And this applies whether you’re leaving a job or you’re shutting down an existing business. Either way, you’ve ended an employment arrangement and can now gain access to your funds.
You then have the option of using those funds to start a new business.
And because you’re over 60, you won’t have to pay taxes on anything that you withdraw. This means you can take a lump sum or withdraw the funds as an income stream without having to worry about further expenses.
Unfortunately, there is a caveat to this form of access.
You may wish to make further super contributions to your super when you’ve started your new business. If that’s the case, you can’t access these new contributions until you end your employment with your new business.
How Do You Gain Unrestricted Access to Your Super?
The only way to get completely unrestricted access to your super is to turn 65. This is the previously noted preservation age and reaching it removes all conditions placed on the fund. This means you can use the money you’ve saved for any purpose, including starting your own business.
You should also be able to make any withdrawal without paying tax. As such, this may be the best option if you’re willing to wait until you’re 65 to start a business.
What Type of Business Should You Consider Starting?
This is a difficult question as the answer partially depends on what you want out of your business venture. However, several sectors typically prove popular in Australia, assuming you have a strong business. These include the following:
- Businesses in the service sector, such as textiles and telecoms, are a large part of the Australian economy. As such, a service business has a higher possibility of succeeding.
- Online businesses often prove profitable. Plus, they come with the added benefit of requiring a low start-up sum.
- Cafes, restaurants, and catering services can also prove profitable. This is a competitive sector, but it’s one where you can make a lot of money if you can differentiate yourself.
Ultimately, the answer comes down to what you want from your business and what you can afford. We recommend speaking to a financial advisor before you try to start a business with super.
Are There Any Risks Involved with Using Super to Start a Business?
As with all business ventures, there are some risks involved if you decide to use your super to start a business.
This is especially the case for those under the age of 65. Accessing your super requires you to make changes to the fund.
For those under 60, those changes mean they can’t contribute to the fund while they’re using it. As a result, you won’t be able to continue saving for your eventual retirement. So you need to feel very confident in the prospective success of your investment.
Also for those under 60, accessing super at this age also means you have to pay tax on your withdrawals. This may not be desirable, especially as accessing your funds tax-free at the preservation age is one of the main benefits of a super.
Finally, there’s the more obvious risk of business failure.
According to the University of Technology Sydney, about 30% of businesses fail during their first year. This rises to 50% for the second year and 75% by the fifth year.
A failed business would result in the loss of your super savings, which can place you in a difficult position later in life.
Do You Want to Start a Business?
If so, you may be able to start a business with super. However, doing so does not come without risks. Plus, you will face several restrictions if you want to start the business before you turn 65.
The good news is that other options exist.
If you don’t feel comfortable using your super for your business ventures, consider taking an unsecured loan instead.
At Unsecured Finance Australia, we offer loans from $5,000 to $300,000. These loans don’t require collateral and may help you to start a business without risking your super.
To find out more, apply online with us today.