There are two types of superannuation funds available to Australians:
- Defined benefit and;
- Accumulation funds
Understanding your super fund and considering your options can help you plan for the future financially – especially for your retirement.
What are defined benefit superannuation funds?
A defined benefit fund is a superannuation fund where your retirement benefits are calculated by a pre-determined formula rather than on investment market performance. This means you can have a clear understanding of exactly how much money you will receive in retirement.
The benefits you receive from your defined benefit fund are determined based on your employment details (such as your final average salary or length of employment) – rather than on your super fund’s investment performance.
This can be appealing as you will be entitled to a consistent retirement income stream rather than varied income due to fluctuating market performance/investment risk.
Who is eligible for a defined benefit fund?
Accumulation super funds are far more common in Australia than defined benefit super funds.
This is primarily because not many Australians are eligible to have a defined benefit super fund.
Most defined benefit funds are corporate funds or public sector funds. Many are now closed to new members.
Some of the biggest defined benefit funds in Australia include:
- TelstraSuper
- Qantas Super
- Rio Tinto Staff Super Fund
- Commonwealth Superannuation Scheme Fund (CSS)
- UniSuper
- Gold State Super
Defined Benefit Funds vs. Accumulation Super Funds
With an accumulation fund, your super accumulates over time from compulsory super contributions from your employer and any other contributions you make. Your super fund invests your money for you so this is how it can continue to grow over time – through investment returns depending on market performance.
With a defined benefit super fund, your retirement benefits are determined by a specific formula instead of being based on investment returns.
Are defined benefit super funds better than accumulation funds?
As stated previously, most defined benefit funds are not taking on new members.
If you are thinking of leaving a defined benefit fund, consider seeking personal financial advice.
Some defined benefit funds are very generous and can provide more benefits than accumulation funds, so make sure you’ll be financially better off. If you leave, you can’t rejoin.
Different fund types provide a variety of advantages and disadvantages. Knowing what kind of super fund you belong to will help you make more informed super savings decisions.
While a defined benefit plan may appear to be impressive now, it’s always best to athink long-term and to ensure you maximise your retirement income streams.
Seek personal financial advice for your defined benefit super fund options in retirement
Are you in need of retirement advice or assistance managing your defined benefit super fund?
TNR Wealth Management’s financial advisers in can help you secure your family’s future. Backed with accounting and audit experience for over 115 years, we are dedicated to building long-term, mutually beneficial relationships with our clients.
People Also Asked:
Q: What happens to a defined benefit fund in the event of death of a member?
A: If a member who receives income from a defined benefit fund dies, the income stream will revert to a death benefit income stream.
This death benefit income stream will be a percentage of the member’s income stream. From 1 July 2017, the transfer balance cap of $1.6 million was enforced. This means that a death benefit paid after this date can’t be retained in the accumulation phase and must be paid as a death benefit income stream or as a lump sum from the super fund.
Q: What are the different defined benefit options?
A: Upon retirement, you can choose to have your retirement benefits paid as:
- a lump sum
- a lifetime defined benefit pension; or
- a combination of these two options.
Q: Which defined benefit income stream option should you choose?
A: You’ll need to consider your retirement goals and objectives to determine which defined benefit option is right for you.
While a lump sum payment may be tempting to pay off debts, the increased life expectancy of people since defined benefit schemes were established (most in the early 1900s), means you could comfortably service any outstanding debts such as your mortgage, plus live a comfortable lifestyle with the lifetime pension option.
Of course, other factors will come into your decision such as your age and overall financial position, so you should seek professional advice from a financial planner before you make any decisions about your retirement income.
Q: What are the pros and cons of each defined benefit withdrawal option?
A: Each defined benefit withdrawal option has pros and cons.
Perhaps the biggest potential benefit of choosing a lump sum payment is the freedom you have in deciding how that money is used. For example, you might find you have more investment options.
The major con of choosing the lump sum payment option is the tax implications.
The key benefits of choosing the lifetime pension include consistent tax-free income during your retirement. With today’s increased life expectancy, a lifetime pension may also be a more reliable form of income if you’re in good health and expect to live well into your twilight years.
Choosing the right superannuation products is important, so seek the advice of a qualified financial planner to understand the right defined benefit fund for you.
For more information or to speak to our Financial Advisers, call us on 02 6621 8544
