If you have a defined benefit superannuation scheme you have no doubt been told at some stage how lucky you are to have a great superannuation fund. Whilst this statement is somewhat true, its only a great fund if you make sure you maximise your final retirement benefit.
Most people today have a normal superannuation arrangement where their employer contributes 10% of their income to a superannuation fund. These are known as accumulation funds where balances are invested and change in value on a daily basis.
History of Defined Benefit Schemes
The compulsory need for employers to make mandatory contributions to an employee’s fund was only introduced in 1992. Prior to 1992 many employers did not make any contributions to an employee’s retirement benefits.
Defined benefits superannuation schemes were a popular superannuation vehicle prior to 1992 with most effectively closed to new members today. These are a type of superannuation investment that were often based on a formula that determined the employee’s final retirement benefit. These funds were particularly popular for Government organisations and large corporations and whilst most are closed, many people still hold these funds today.
The main schemes that exist today include State Superannuation Scheme (SSS), State Authorities Superannuation Scheme (SASS), Police Superannuation Scheme (PSS), Commonwealth Superannuation Scheme (CSS) and Public Sector Scheme (PSS).
Maximising Your Defined Benefit Scheme: Accumulation Phase
The calculation in determining a benefit amount under these schemes is often complex and varies across the different schemes. Whilst the final outcome can be quite beneficial to the member financially, it’s important to note that many people often reach retirement without realising the full financial benefit they could obtain from their scheme. Sometimes this might be a few thousand dollars, but other times it can be much more detrimental, potentially hundreds of thousands.
I’ve dealt with many people over the years with these schemes and the biggest issue I often see is the lack of understanding they have around how their scheme is calculated and what they need to do to get the most out of it. It’s important if you have a defined benefit scheme that you seek advice in relation to understanding your benefit and how you are placed to make the most of it – it’s important to do this now rather than waiting until you are ready to retire where it may be too late.
There are also other traps that often people can get caught in – these will vary across the different schemes so it’s important to seek advice should something change in your situation for your particular scheme. Some of these common traps include:
- Listening to a friend or colleague on how your scheme works or how to maximise the benefit – often work colleagues can be a great source of information on your scheme but they can also be misguided in their knowledge. What is right for them may also be completely wrong for your situation.
- Understanding the impact of changes to your position and salary – increases or decreases to your income can positively or negatively impact your final benefit.
- The timing of when to retire – The date you retire could impact your final benefit. This may be due to things such as potential pay rises that may be due or when salaries are reported to your superannuation scheme.
- Understanding the impact of taking leave on your benefit – this can be particularly important if you do shift work or the leave involves a reduction in your normal entitlements.
- Understanding the impact of moving to a part-time or casual arrangement – the impact of moving to a different employment arrangement can impact the final benefit or slow down its growth over time.
- Understanding what benefits the scheme offers in relation to death and disability benefits – its important to understand what the fund offers if death or disability was to occur as you may need to ensure you have further appropriate cover in place to deal with any potential shortfalls.
Maximising Your Defined Benefit Scheme: Retirement Phase
Whilst it’s important to make the most of your scheme its also important to understand the options that it provides you in retirement. Some offer lifetime pensions where the superannuation fund will pay an income for life with no investment risk whilst others offer a lump sum payment that needs to be then utilised to meet your income needs in retirement. Some funds will even offer a combination of the two as well as benefits for a spouse should the member pass away.
It’s important to understand these options but also determine what the best course of action is based on your own personal financial situation and long-term needs.
How We Can Help
At Lambourne Partners we have over 25 years’ combined experience in dealing with the intricacies of defined benefit schemes. Should you wish to discuss your current arrangement with us please contact Joel Briggs below or on (02) 4969 6600.