Tom Noad* says that defined benefit super schemes can set us up for a secure financial future but they are complex so it’s important to time retirement to maximise final benefits, and therefore income, in retirement.
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When is the right time to retire for a defined benefit scheme member?
Having enough money to retire is important, but it’s not the only thing you should think about.
I’ll always discuss with clients what sort of lifestyle they’re planning to have.
Have you given much thought to what you’ll be doing and where you’ll live?
Talking about these plans also helps to determine how much income you’ll need, which is a critical part of your retirement vision.
Many people prefer to keep working because they like their job, and it provides them with routine. If that sounds like you, or if your benefit currently falls short, then it may be in your best interests to delay retirement.
How can you determine what your benefit will be?
Being a member of a defined benefit scheme can make it trickier to know whether you can afford to retire yet.
Members of a super accumulation fund can look at their current balance and then run the numbers to see if they’ll have enough to generate the income they need for retirement.
For defined benefit scheme members, it can be more complicated.
Your benefit is determined by a number of variables, which can include: your age; superannuation salary; contributions made by you and your employer; and the number of years you’ve been in the scheme.
The inputs and formula used to work out your final benefit are different depending on which scheme you belong to.
You can get a good estimate of your benefit by phoning your super scheme provider but may need advice to fully understand how when you retire could make a difference.
For example, the NSW State Authorities Superannuation Scheme (SASS) calculates superannuation salary as the average of a final salary and the salary received on 31 December for the previous two years.
For State Superannuation Scheme (SSS) members, the salary being paid on the last day of employment is the salary used to determine the pension benefit.
Is there a minimum age for accessing your scheme benefit?
In theory, you can stop working at any time.
If you’re relying on your defined benefit pension to pay your way, you’ll need to reach the minimum age for your scheme before cashing in.
Public Sector Super Scheme (PSS) members can begin drawing down their pension benefit from age 55. However, access to a lump sum payment is restricted until they reach preservation age — currently 60 for people born on or after 1 July 1964*.
If future changes to federal policy raise the preservation age, scheme members could be waiting even longer for a lump sum to pay off a mortgage or kick-off retirement with some travel.
Are there any other ways that timing could affect your final benefit?
Your preservation age is one of many things controlled by government policy; tax rates, benefits and concessions are another.
So, it’s important to look at how a decision to retire early might affect your net income and any benefit payment you’re receiving.
Once you feel comfortable that retirement is affordable for you now, fine-tuning your last day at work may still be important.
Depending on the rules for your scheme, a recent pay rise may not be accounted for in your final benefit.
For PSS members, a salary increase will only be part of your final average superannuation salary calculation after your next birthday.
Working for just a few more months before retiring may be worth the wait if it means you’ll receive a higher end benefit.
Take the next step
With the right help, planning for your retirement is easier than you think. For more expert tips, visit the StatePlus website at this PS News link.
* Tom Noad is a registered financial planner with StatePlus and can be contacted at [email protected].
* www.ato.gov.au/Individuals/Super/Accessing-your-super/
StatePlus, formerly State Super Financial Services, is one of Australia’s leading providers of financial planning. Since 1990, our retirement experts have provided life changing financial advice to public sector employees and their families. With a StatePlus planner by your side, you can feel confident about reaching your financial goals to live the retirement you really want.
This article was published in June 2018. This is general information only and does not take into account your personal objectives, financial situation or needs. It is important to seek financial and taxation advice that takes into account your personal objectives, financial situation and needs before making any decisions based on this information.
