Planning for retirement with the PSS

If you’ve got a Public Sector Superannuation (PSS) account, but are not really sure what it is or how it works or importantly, what it means for you – it’s worthwhile getting yourself familiar with it because the PSS, like many defined benefit super funds, are generally considered extremely generous.

Why is the PSS attractive?

The simple reason is because the final benefit at retirement is calculated using a formula, rather than being based on fund balance or investment returns. This means contributing members of the PSS who plan to stay with the fund until retirement don’t have to worry about share market volatility or low interest rates affecting their final benefit. This in itself can give peace of mind for most pre-retirees.

What are the options at retirement?

The final benefit can be claimed in a few different ways, but there is one that stands out and it’s usually is the best option for most people – that’s full indexed pension. Here’s why:

  1. Compared to other retirement pensions available from more regular super funds, the full indexed pension is a guaranteed pension that increases every year with the consumer price index.
  2. The full indexed pension gets paid as a fortnightly payment every year for the rest of your life. Plus, 67 per cent of the pension can pass to your eligible spouse if they outlive you.
  3. A common misunderstanding about the PSS is that it can’t be accessed until preservation age is met, which for most people is 60 years old. However, this is not the case for the full indexed pension. It can be claimed from age 55 onwards if you’ve retired, or earlier, if claimed under a redundancy.

How is the PSS pension calculated?

This is where it can get confusing. To calculate the PSS pension, the formula is based on your contribution rate, age and average salary across your last three birthdays prior to retirement. Therefore, to help maximise your final PSS pension ― aside from getting a pay rise and working longer ― if your cash flow allows, contributing the maximum 10 per cent member contribution is considered very effective.

Scenario

Let’s consider a 50-year-old contributing member with a current PSS account balance of $350,000.

If the member contributes 5 per cent over the next 10 years and then retires at age 60 on a final average salary of $80,000, they could expect a full indexed pension of around $46,000 per year before tax is taken out.

According to the AFSA Retirement Standard*, this is about the annual income a single person needs to live a comfortable retirement. So, this might be enough for this person’s retirement.

However, if this same member immediately increases their contributions to 10 per cent, their annual pension at age 60 would increase to $53,000 per year before tax.

This equates to an extra $7,000 they would have each year for the rest of their life, which can make a significant difference to an individual’s lifestyle.

Because the full indexed pension is offered on terms that are considered to be more generous than commercial pensions, maximising PSS member contributions can provide a better financial outcome when compared to other investment or building wealth strategies. 

How is the PSS pension taxed?

The other feature that makes the PSS pension so attractive is that it is concessionally taxed. That means only a portion of the pension is taxed and with the tax offsets available, especially after age 60, some PSS members will pay very little tax on their pension and in other cases, none at all. 

Key takeaways

While the PSS is extremely generous, it is also a very complex super scheme.

If you need more personalised advice and guidance on your PSS benefits, our team of strategic financial advisers are well experienced in defined benefit super and can help you cover the key issues, including:

  • calculating your PSS entitlements at your preferred retirement date
  • determining which claim option is most appropriate for your circumstances and goals
  • estimating the tax on your final PSS pension
  • how your PSS pension interacts with any other super you or your partner may have.

Importantly, even if you’re still 10-15 years away from claiming your PSS, taking the time now to get advice from an adviser who is also a PSS specialist can help you make sure you are doing everything you can to understand the tax implications and work with you to get the most out of your PSS.

Importantly, even if you’re still 10-15 years away from claiming your PSS, taking the time now to get advice from an adviser who is also a PSS specialist can help you make sure you are doing everything you can to understand the tax implications and work with you to get the most out of your PSS.

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Ishara Rupasinghe has been with the firm since 2007 and is a director of the Family Wealth Management team in Canberra.

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