Review defined benefit funds

While defined benefit fund members may be concerned about how the 2016-17 budget changes will affect them, there's no need for them to make immediate changes to the level of personal contributions to their funds.
 
The changes affecting defined benefit funds don't begin until July 1 2017. With an election on the way, it's possible all the changes won't be legislated. There'll be ample time for defined benefit fund members to review their contribution strategies over the next year.
 
Public servants and other defined benefit fund members whose only superannuation is their defined benefit fund are unlikely to need to alter their contribution levels to protect their situation. Indeed, members of some funds such as the PSS stand to lose valuable additional employer-provided benefits if they reduce their personal contribution levels.
 
The budget papers make clear that only a relatively small number of defined benefit fund retirees face additional tax on their pensions of more than $100,000 annually. This doesn't remove the advantages of receiving as large a pension as possible from a defined benefit fund, especially if the bulk of this payment is paid for by the employer.
 
With the military MSBS closed off to new entrants from 1 July 2017, all the federal government schemes, except for judges', will have been closed off to new entrants. The government's motivation for closing off entry was to reduce future outlays, particularly those associated with paying lifetime indexed pensions.
 
The benefits still offered to existing defined benefit fund members remain unchanged, providing the opportunity to fund a comfortable and certain retirement income.
 
Defined benefit fund members with second private super funds may face a problem if they wish to contribute additional after-tax money to their second fund. They'll be caught by the proposed new lifetime cap on after-tax super contributions of $500,000 from July1 2007.
 
Past and future after-tax contributions to defined benefit funds are included in this cap but defined benefit fund members will still be able to contribute to their fund even if their past after-tax contributions have exceeded $500,000.
 
Very few people are likely to be in this situation. But if they are, the budget proposal allows future contributions to continue with an equivalent amount being withdrawn from their separate accumulation funds.
 
This arrangement will protect their ability to maximise the employer-defined benefit subsidy to their retirement but will limit their ability to put after-tax money into accumulation super funds.
 
Defined benefit fund members shouldn't contribute new after-tax money into a second fund unless they're certain the $500,000 lifetime cap won't be exceeded by their future contributions.

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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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