Take income stream, not lump sum

Federal and state government decisions to close off new entry to their defined benefit super funds have not only reduced the costs for taxpayers but also ensured members can be confident of receiving all the lifelong benefits promised to them - unlike in the US.

A combination of factors has increased the value of defined benefit super funds to their members, especially those offering lifetime indexed pension benefits to members. Their biggest advantage is that, apart from the UniSuper fund, the payment of the promised benefits is guaranteed by employers.

All the investment risk is thus borne by the employer and, in the case of government defined benefit schemes, taxpayers. In terms of funding a comfortable retirement, nothing could be better or more secure than receiving a regular guaranteed income stream.

Apart from not having to be concerned about historically low interest rates and investment fluctuations such as those that occurred in the global financial crisis, defined benefit members have access to retirement income streams that are either not available or extremely expensive from private sector providers.

The icing on the cake for defined benefit members is that their employer pension schemes were devised in periods such as 1915 in NSW and 1922 for the Commonwealth when the expected life span in retirement was short. Today, following huge gains in mortality rates, expected retirement lifetimes, including those of reversionary beneficiaries, are up to three times longer.

Compared with taking a lump sum alternative, the indexed pensions now on offer to DB retirees are very attractive. This is evidenced by the large increase in take-up of DB pensions, including in redundancy situations where cash-outs are available.

New entrants to the workforce don't have access to employer-guaranteed defined funds but existing members receive superior benefits to those available to their less fortunate colleagues. There are even some additional bonuses available in some defined benefit funds that were originally designed to save money from members not keen to contribute or cash out benefits when the opportunity arose.

In several funds, the most valuable bonus comes from contributing more than the minimum required. The benefit of doing so in the largest federal government defined benefit fund, the PSS, is because of the additional matching employer benefit of far more value than that from paying off the mortgage.

There's a clear message for all existing defined benefit members, including those with deferred or preserved benefits until retirement. Become familiar with the ways to gain best value from the benefits on offer. Even when a lump sum may have appeal to pay off a mortgage or other debts, the after-tax indexed value of the alternative pension can still provide a larger return.

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Daryl Dixon

Executive Chairman

Daryl Dixon is one of Australia’s foremost investment experts and a well known writer and consultant. He has provided trusted advice to thousands of personal clients over more than 25 years and is an acknowledged expert in the areas of tax, superannuation (including public sector superannuation), social security and investments.

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