How superannuation options stack up for public servants

The budget decision to close new entry to the unfunded military superannuation scheme in 2016 comes 10 years after similar action for the public sector scheme (PSS). Both these measures had one basic objective: lowering the future cost of federal employees' superannuation benefits.

For investors wanting lump-sum benefits, both the current military scheme and the PSS have drawbacks. Benefits are based on final average salary in the last three years of service and also, on resignation before retirement, the employer benefit, except for a small productivity component, increases only in line with the CPI. Departing members, except via redundancy, do not have the option to switch to a higher-yielding fund.

These features compare unfavourably with other lump-sum schemes and are not why entry to these two funds has been closed off.

Increased longevity has resulted in faster than predicted growth in the cost of paying the alternative pension options offered by these funds. Life expectancy has lengthened dramatically, increasing the attractions of opting for these government-backed income streams. The worldwide fall in interest rates and fluctuations in investment returns since the global financial crisis have also added to the attractions of taking part or all of the benefit as a pension.

This background is relevant for all PSS and military super members, but the pension option has additional benefits for members accepting a redundancy. The redundancy benefit can be converted to a lifetime indexed pension starting immediately at any age. Benefits taken as a lump sum have mostly to be retained untouchable in a super fund until as late as 60.

The immediate indexed pensions available at younger ages are smaller than those at 60 but still compare favourably with alternative investment options. For example, at 40, a redundancy lump sum benefit of, say, $200,000 has to be retained in a super fund, whereas this amount can be exchanged for an immediate lifetime pension of $13,333 with an attached surviving spouse benefit indexed half yearly by changes in the CPI. The same investment in a superannuation fund would have to increase in value by at least 8 per cent a year to provide a comparable return. More importantly, the immediate pension helps to cushion the fall in disposable income resulting from redundancy.

The pension is taxable but, on obtaining alternative employment, the tax payable can be reduced via salary sacrificing super or as many employed past federal employees have been doing, by using negative gearing to reduce the tax on the redundancy pensions.

The crucial message for all public servants is to evaluate carefully their super options if they choose to accept or are forced to take a redundancy.

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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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