A Defined Benefit Super Fund is an older type of superannuation fund generally available to employees of the public service sector and some large corporate companies. Majority of these funds are now closed to new employees.
The value of your retirement benefit is defined by the fund rules and usually depends on:
Defined Benefit funds are often generous and low-risk. If your fund’s investment performance is poor, the fund and your employer are still obligated to deliver the benefits due when you retire. So long as your employer and the fund can afford that, your investment risk may be limited to what’s earned on any personal contributions. Because of the fund’s obligations, you often have very limited choice in how your superannuation dollars are invested.
During severe market downturns, some defined benefit funds can reduce the benefits payable across all members, including pension payments, in order to be able to continue to meet the fund’s obligations.
If you leave your employer, you may be forced to keep your money in that fund, possibly at low rates of return, until you retire.
An Accumulation Super Fund is the most common type of superannuation offered to employees today. The value of your retirement benefit depends on:
In these funds, you take the risks and get the rewards from your fund’s investment performance.
You have the choice of how you wish the funds to be invested or you can leave it up to the fund to decide by choosing their “default” option.
At retirement, you generally have the option to take a life-time pension, lump sum payment or combination of life-time pension and lump sum – please check with your specific fund as they may have different rules that apply.
Below we have summarised the benefits and risks of each of these options.
You could take part of your benefit to pay off any debts or invest the funds for future uses and keep the remaining funds to start a life-time pension. Some Defined Benefit funds offer this option whereas others do not – check with your fund.
In determining the most appropriate option, you need to consider the following important questions before you retire:
In deciding which option to take, we can help you by determining the break-even point between taking a life-time pension or account-based pension or combination of the two.
If you are nearing retirement and would like advice in regards to your superannuation and pension options contact Prudentia Financial Planning today for a free initial consultation.
Prudentia Financial Planning Pty Ltd is a Corporate Authorised Representative (No. 400165) of MyPlanner Professional Services Pty Ltd AFSL 425542
Financial Advice Sydney and the North Shore Office based in Gordon NSW