Defined benefit superannuation funds
A defined benefit super fund (“DBF”) provides a pension for life for a retired employee. This style of fund is usually in the corporate or public sector. The retirement benefit formula is based on years of service with the employer (or years of membership of the fund) and average salary level over the final years prior to retirement. (eg. the formula may be will receive a lump sum 15 per cent of final average annual salary for each year of membership.)
Unlike an accumulation superannuation fund, the member does not carry the investment risk as the member's benefits do not depend on investment performance. Instead, the contributing employer carries the risk, (eg if investment returns are low, the employer may need to increase their contributions to enable the fund to meet its required payments). The trend of employers to move away from defined benefit funds and/or conversion to accumulation funds is likely to continue, due to the continual financial obligation to former employees.
There are many considerations for DBF members for changing circumstances, such as:
These funds tend to be much more complex than accumulation funds, with differing available retirement ages, the mix of pension & lump sum benefits, concessional contribution caps. Questions that members need to consider include:
- Upon retirement, should you stay in the plan or take your money?
- What happens when I die? What will my family receive?
- What is the comparable return if I take my money as a lump sum?
- Should I increase or decrease contributions?
It is important to speak with your financial planner before making any decisions about your DBF and compare the options available to you. Your planner can provide you financial projections on each scenario as well as outlining the advantages & disadvantages of each. DBF advice needs to take into account the following considerations:
- Superannuation planning
- Retirement planning
- Estate planning
- Investment selection
- Taxation planning
- Cash flow & budgeting
Life Planning Solutions can provide you comprehensive planning advice with regards to all superannuation and retirement needs, objectives and goals.
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This editorial provides general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your particular investment objectives, financial situation and individual needs. Charter Financial Planning and its Authorised Representatives do not accept liability for any errors or omissions of information supplied in this editorial.
