Secret strategies to boost PSS benefits
Secret strategies to boost PSS benefits.
Personal contributions It's in the interests of PSS members to contribute more than 5 per cent of their salary.
The more money PSS members contribute to their fund, the larger their benefits will be, especially compared with their colleagues in the CSS, who gain no extra employer benefit for contributions above 5 percent of salary.
Indeed, after the maximum benefit limit was lifted to the higher of $600,000 or 10 times final average salary, PSS members can obtain substantial extra benefits by contributing the maximum 10 percent. This is true despite the often incorrect advice from personnel and ComSuper advisers that there is no advantage in contributing more than 5 per cent of salary in the first 10 years of membership. For many PSS members, this is inaccurate.
As originally designed in 1990, the PSS was structured to provide larger employer benefits to members making larger personal contributions to the fund. This was a deliberate money-saving trap designed to deprive the ill-informed, unwary and financially stressed of the generous benefits that the CSS provided automatically for all members at a 5 per cent contribution level.
As it now operates, a rough rule of thumb is that a PSS contribution rate of 10 per cent is needed to provide comparable employer benefits to those the CSS previously provided at a 5 percent rate.
Neither Treasury nor the Finance Department, for obvious reasons, ever publicised this while encouraging CSS members to transfer to the PSS. In its original design, the scheme provided matching employer contributions for the full 10 per cent contribution rate from day one. However, then finance minister Peter Walsh insisted that the matching arrangement be reduced to cover only a 5 percent contribution rate over one 10-year period of membership.
What many PSS members haven't been told is that there are benefits in maximising their contributions from day one. The most substantial is the larger death and permanent disability cover provided at a 10 percent contribution level. This benefit is calculated on the assumption that the member contributes at their current level until the age of 60.
Informant modelling for a member joining at 20 is that the death and invalidity benefit from a 10 per cent contribution rate would be at least 19 per cent higher than that from a 5 per cent contribution rate.
This higher level of benefit would, among other things, cover the repayment of a mortgage and other debts, as well as provide replacement income for dependants. A second advantage of a larger contribution level from day one of membership is that, because salaries rise over a career, it is less costly to contribute 10 per cent of salary in the early part of a career and 5 percent over the last 10 years of employment.
Finally, another compelling reason for contributing at the highest possible rate is that the higher the personal contribution rate (up to 10 per cent), the larger the CPI-indexed retirement pension will be.
The formula used to calculate the pension at retirement is extremely generous compared with the cost of privately marketed indexed pensions.
One actuary told the Informant that the private sector would only offer a pension of no more than 65percent of the PSS pension for the same amount of money. Given that contributing PSS members are guaranteed against losses because their fund benefits relate to their final average salary, there are no negative effects from maximising contributions to the PSS.