A defined benefit scheme is a fund where an employee receives a specified pension payment, lump-sum, or combination of the two on ceasing employment.
The payment is determined by a formula based on a variety of factors that can include your earnings history, contributions to the fund, and length of time in the job.
Both government and corporate defined benefit schemes exist. They all have their own peculiarities and knowing the fine print can make a big difference to your financial future. Having dealt with hundreds of clients in these schemes, I’ve noticed that some members become overawed by their complexities, and that can cost them money.
One of the biggest schemes is the NSW State Authorities Superannuation Scheme (SASS). The beneficial nature of this scheme means it was closed to new members on the 18 December 1992, but there are still lots of people heading towards retirement under it. Members include emergency services officers, bus and train drivers, health professionals, teachers, power station workers, and essential services workers. If you’re in this scheme here are some of the finer points you need to consider:
1. The SASS defined benefits scheme is a points based system
The main component of the overall benefit is known as the Employer Financed Benefit (EFB). The aim of members should be to maximise the amount of money their employer is required to pay upon leaving employment. A maximum average of 6 points per year can be accrued by a member.
The EFB is maximised when the employee has built up 180 points over at least 30 years of full-time service. However, there is a link between the amount of points that the employee contributes into the fund (the personal account) and the EFB. The EFB will only match the equivalent points the member has contributed over their years of service.
Take someone who is a member for 22 years, contributes 5% for the first 10 years (50 points), then 9% for 12 years after that (108 points). Let’s say the member has a Final Average Salary of $100,000.
• The member has contributed 158 points but the employer contributes a maximum of 132 points (22 years x 6)
• EFB = 2.5% x 132 x $100,000 = $330,000
• The additional 26 points contributed by the member aren’t wasted or lost, they simply accumulate in the member’s personal account, which operates more like a regular accumulation superannuation fund.
Many employees neglect to maximise their own contributions into SASS. It can potentially cost them hundreds of thousands of dollars. This is easily prevented by seeking the advice of a specialist financial planner in this area.
2. The time of year you retire is important
In most circumstances the final average salary (FAS) is used as part of the EFB calculation. The FAS is based upon the “Superable Salary” of the member at the time of ceasing employment and the “Superable Salary” of the member at the previous two 31 Decembers.
Most NSW State Government employees receive their annual pay rise in either January or July. Waiting for your annual pay rise before you leave can be very beneficial. Retiring in the early part of the calendar year can also be beneficial. Shift workers (including bus and train drivers, power station workers and health professionals) need to be especially careful as taking extended periods of leave or winding down their work hours closer to retirement can be detrimental in relation to their FAS and therefore their SASS entitlement.
3. Should contributions to the personal account be pre-tax or post-tax?
SASS members now have the ability to make their mandatory superannuation contributions to the fund as either pre-tax (salary sacrifice) or post-tax contributions. This decision can impact personal income tax positions, access to the government co-contribution, and the amount of tax liable to be paid as a lump-sum death benefit. The member’s taxable income and their concessional and non-concessional contribution caps are also relevant. Professional advice can ensure you structure this to maximise the advantage for your particular circumstances.
4. What is the appropriate investment option?
One of the beauties of the SASS scheme is that the EFB (which forms a large proportion of the benefit) isn’t impacted by the stock market or investment returns. However, the personal account is.
Members have a choice of four different investment options: cash; conservative; balanced; and growth. Age, tolerance of risk, and proximity to retirement are key factors to consider when making this choice. It is important to note that for deferred SASS members their entire benefit is impacted by the investment option selected.
Other defined benefit schemes also have their complexities. This highlights the benefit of seeking specialist advice from a financial planner who is experienced in how they work and dedicated to getting the best possible result for you. The best time to do this is now. Based on the example above, maximising your benefit when you retire involves planning over time.
If you would like to explore your options with someone who knows their way around the intricacies of defined benefit schemes, give Lachlan Ashelford a call on (02) 4969 6600 to book in for a complimentary chat.