by Peter Burke
Although Defined Benefits Super Funds are not all that common these days, we still find quite a number of clients and potential clients who have Defined Benefit Supers.
It is therefore very important for us as planners, and also for the potential Defined Benefit members out there, to have a reasonable understanding of –
- WHAT THEY ARE?
- HOW BEST TO MANAGE THEM?
- WHAT ARE THE OPTIONS AVAILABLE?
- and WHAT THE PRO”s and CON”s might be for differing circumstances?
WHAT ARE THEY
In a defined benefit fund, your retirement benefit is determined by a formula instead of being based on investment return
If you are a member of a defined benefit super fund, the amount you receive will depend on factors like:
- How much your employer has contributed into your account
- How much you have contributed
- How long you have worked for your employer
- Your final average salary when you retire.
Most defined benefit funds are corporate or public sector funds. Many are now closed to new members.
These days, most Australians are members of an accumulation super fund but it was a different story in the days before super became a workplace entitlement for all employees.
Back then – if you had a super account at all – it was much more likely to be in a defined benefit super fund. As the Productivity Commission’s 2018 report noted, super “began in 1862 with the establishment of a defined benefit pension fund for the employees of the Bank of NSW. Superannuation followed this model for the next 100 years: defined benefit pension funds were established for a minority of employees, who were generally higher-paid white-collar employees in the private sector or civil servants in the public sector.”
Defined benefit super funds are the traditional funds and accumulation funds are their younger siblings.
But being an older type of super fund doesn’t mean a defined benefit fund is outdated. In fact, in many ways they offer their members a much better deal than the newer style accumulation funds. In many other countries, pension (or super) funds offer their members defined benefits, with accumulation pension funds being much less popular.
HOW ARE THEY DIFFERENT?
- DEFINED BENEFIT – GUARANTED END RESULT BASED ON FORMULA AND RISK SITS WITH EMPLOYER
- ACCUMULATION – END RESULT IS MARKET LINKED AND RISK WITH MEMBER/OWNER/BENEFICIARY
There are three main types of defined benefit fund and different rules apply when calculating their super contribution amounts. The rules depend on whether contributions are made to:
- A funded defined benefit fund (often corporate super funds)
- An unfunded defined benefit fund (often older public sector funds, including constitutionally protected super funds)
- A hybrid super fund (provides a defined benefit and also allows members to have an accumulation account).
OFTEN DIFFERENT BETWEEN GOVERNMENT AND CORPORATE
- LIFETIME PENSION?
- POTENTIAL to COMMUTE PENSION ENTITLEMENT PARTIALLY OR FULLY AT TRIGGER POINTS (AGES)?
- DEFINED BENEFIT VALUE CAN/WILL CONVERT TO ACCUMULATION AT RETIREMENT?
- NO MARKET RISK IN WORKLIFE
- CERTAINTY OF END RESULT AT RETIREMENT
- GUARANTEED LIFETIME PENSION (INDEXED USUALLY)
- OFTEN POSSIBILITY OF PARTIAL COMMUTATION TO LUMP SUM
- POTENTIAL TO PROVIDE SPOUSE 67% IF SURVIVES
- NO MARKET RISK IN RETIREMENT
- OFTEN SG CALCULATION BETTER THAN NORMAL 10.5% SO CAN INCREASE OPPORTUNITY FOR SAL SAC
- IF LONG SERVING EMPLOYEE LAST FEW YEARS OFTEN LITTLE OR NO GROWTH IN MULTIPLE/BENEFIT
- NO CONTROL OVER MARKET/INV RISK TAKEN
- NO ESTATE VALUE
- LACK OF CAPITAL ACCESS
SUITED BEST FOR WHO?
This is the key part of the decision-making process for ourselves as planners in consultation with you our clients.
A clear understanding and agreement on a number of potential variables, will allow an educated discussion about how best to make optimal use of any Defined Benefit Super you may have!
Examples of key variables TO CONSIDER –
- OTHER INCOME?
- OTHER CAPITAL?
- POTENTIAL FUTURE PLANS?
- POTENTIAL FUTURE CAPITAL COSTS?
- POTENTIAL INHERITANCE?
- COUPLE OR SINGLE?
- INDIVIDUALS RISK TOLERANCE?
REMEMBER – ONE SIZE DOES NOT FIT ALL!!!
This blog contains information that is general in nature. It does not take into account the objectives,
financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.
If you decide to purchase or vary a financial product, your financial adviser, AMP and other companies within the AMP Group may receive fees and other benefits. The fees will be a dollar amount and/or a percentage of either the premium you pay or the value of your investment. Please contact us if you want more information.
PB Financial Solutions Pty Ltd ABN 67 097 381 523 – trading as Burke Britton Financial Partners & Securelife Financial Solutions is an authorised representative and credit representative of AMP Financial Planning Pty Limited, Australian Financial Services Licensee and Australian Credit Licensee.