Learn how defined benefit super works and what it could mean for retirement.
What is defined benefit super?
Defined benefit super is a type of super account that works differently from most other super accounts.
Most defined benefit super accounts were set up by an employer. The employer’s rules help determine what you’ll get when you retire.
Defined benefit super accounts are less common and only accept certain workers or no longer take new members.
Most super accounts have a balance that rises and falls over time, based on how much money you and your employer put in and how you invest it. This affects what you’ll get when you retire.
With a defined benefit account, your super fund uses a formula to work out what you’ll get instead.
If you’re thinking about leaving a defined benefit fund, talk to your super fund, or speak to us first. Some funds offer benefits that you may lose if you leave, and you generally can’t rejoin.
How a defined benefit account works
The formula your fund uses to work out what you’ll get when you retire may differ from what other defined benefit funds use.
It may consider:
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the money your employer puts in, and any contributions you make (if your fund allows them)
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your average salary before retirement
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how long you worked for your employer
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your age when you retire.
For example, a retirement benefit calculation might look like this.
A fund uses the following formula to work out your benefit (i.e. how much you’ll get) at retirement:
Average salary for the last 3 years × total years of service with the employer who sponsors the defined benefit account × benefit factor.
If a member:
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had an average salary of $100,000
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worked for 20 years at the employer, and
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has a benefit factor of 0.15
their estimated retirement benefit would be:
$100,000 × 20 × 0.15 = $300,000
Example only
This example is simplified to show how a defined benefit account may work. Every defined benefit fund uses its own formula. Your fund may use different factors when calculating your benefit.
Are defined benefit funds still available?
Most defined benefit funds no longer accept new members. Many were offered by government employers, public sector organisations, universities and large employers.
If you’re already a member, you can usually stay in the fund while you’re eligible.
What happens when you retire?
When you retire, your defined benefit fund may offer:
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a regular income stream
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a lump sum, or
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a combination of both.
Your options depend on your fund.
What is a defined benefit income stream?
A defined benefit income stream pays you a regular income from a defined benefit super scheme.
Your fund works out how much you receive.
Unlike an account-based pension, payments do not usually depend on an account balance or investment returns.
Payments, tax and death benefits can vary between funds.
Understand how different retirement income options can work together to fund your retirement including account-based pensions and lifetime income streams.
Before making changes to your defined benefit super
Defined benefit accounts can offer benefits that other super accounts don’t.
Making changes may affect:
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your future retirement income
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your access to pension benefits
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the tax you’ll pay
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benefits for your partner or dependants.
Before you decide, contact your fund and consider speaking to us for financial advice.
High-pressure sales tactics are putting your super savings at risk. Be on red alert for phone calls, click bait advertising and promises of unrealistic returns to encourage you to put your super into risky investments. Stop, think carefully, and check the claims first.
Questions to ask your fund
Every defined benefit fund works differently. Your fund can explain how your account works.
You may want to ask:
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how your benefit is calculated
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what options you have at retirement
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whether you can receive a pension, lump sum or both
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how your benefit may be taxed
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what happens if you leave the fund or transfer your benefits.
Source: Moneysmart
Reproduced with the permission of ASIC’s MoneySmart Team. This article was originally published at https://moneysmart.gov.au/how-super-works/defined-benefit-super-explained
Important note: This provides general information and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances before deciding what’s right for you. Although the information is from sources considered reliable, we do not guarantee that it is accurate or complete. You should not rely upon it and should seek qualified advice before making any investment decision. Except where liability under any statute cannot be excluded, we do not accept any liability (whether under contract, tort or otherwise) for any resulting loss or damage of the reader or any other person. Past performance is not a reliable guide to future returns.
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