Making the most of a QSuper Defined Benefit account
Imagine not having to rely on investment returns to determine your final retirement benefit, but instead having certainty around the lump sum you eventually receive. For those with a QSuper Defined Benefit account, that’s the reality ― and just one of the reasons these accounts are so valuable, particularly in the current economic environment.
It’s worth noting that these accounts are no longer open to new members, so if you have one, it’s important to understand how they work and what options may be available to help you make the most of your financial situation. We outline some of the key issues you may wish to consider.
Defined benefit accounts versus accumulation accounts
Where the growth in a regular superannuation accumulation account is dependent on the level of contributions and investment returns, a defined benefit account is generally calculated by a formula based on your contributions, length of service with your employer and average or final salary.
This means a defined benefit account is not subject to the impact of market movements, which is why it can offer more certainty around the final retirement benefit.
However, to get the maximum benefit from a defined benefit fund you generally need a long service period with the same employer. For QSuper members this would require you to remain employed by the Queensland government for the majority of your career. If you do leave the QSuper scheme before the age of 55, you will classified as a deferred benefit member and a different formula is applied in calculating your final benefit.
How are contributions assessed for QSuper Defined Benefit accounts?
In order to maintain and grow your defined benefit in QSuper, you’re required to make regular contributions to the fund. For most members, the standard contribution rate for the QSuper account is 5 per cent, but you do have the option to reduce this to as low as 2 per cent ― although this will reduce your final overall benefit.
If you do choose to reduce your contribution rate you can have the opportunity to contribute a greater percentage at a later time to ‘catch-up’ your benefit. However, as in most cases your salary will increase over time, meaning your contribution as a dollar amount could be significantly higher in the future ― so where possible, it’s generally beneficial to contribute the standard 5 per cent.
Understanding notional taxed contribution
In considering how your contributions to QSuper are assessed under the allowable annual super contribution limits, members should remember that unlike an accumulation account, it won’t simply be the total level of employer contributions that get counted. Instead, a notional taxed contribution (NTC) formula will be used, based on a formula linked to your salary as at 1 July and the percentage rate of your contributions.
The same approach is applied for other defined benefit super funds, but a unique formula is used for each fund. And although QSuper’s formula may be complex, it is generous. So, if you are looking to make additional concessional contributions it’s important to confirm your exact assessment under this formula with QSuper, or your financial adviser.
Boosting your retirement balance
Many QSuper members find that after counting the NTC they still have room for extra concessional contributions under the $25,000 annual cap, and this can be a powerful and tax-effective way to increase your retirement balance.
For illustrative purposes, if we look at an example, the QSuper formula is slightly more generous than what would be assessed under a 9.5 per cent super guarantee arrangement. Based on a public servant with an annual salary of $125,000, the NTC is likely to be assessed at $10,500, which equates to approximately 8.4 per cent. In this instance this allows the public servant to still be able to make around $14,500 worth of additional concessional contributions and remain under the annual cap.
If you’re a member of QSuper or other defined benefit funds or are looking at ways you may be able to maximise your retirement balance, please speak to one of our experienced financial advisers.
This insight may contain general financial advice and was prepared without taking into account your objectives, financial situation or needs. Before acting on any advice, you should consider whether the advice is appropriate to you. Seeking professional personal advice is always highly recommended. Any forward-looking statements are based on current expectations at the time of writing. No assurance can be given that such expectations will prove to be correct.