Sting in the super changes for lower paid public servants

Top marks to the Canberra public servant for highlighting the point that many lower income public servants and defence employees are disadvantaged by their employer's superannuation arrangements. Unlike higher income earners, these employees recruited after 2005 (public servants) and 2015 (defence forces) will not face the penalty tax levied on annual employer super contributions exceeding $25,000.

But because their employer pays 15.4 (public service) or 16.4 (defence forces) per cent of their salary as compulsory super, their after-tax take home pay is significantly lower than their private sector colleagues able to limit their employer super to the compulsory 9.5 per cent requirement. Merely by allowing public servants and defence employees to opt to receive only the compulsory super requirement and receive 5.9 or 6.9 per cent more salary, the employees would be much better off at no additional cost to taxpayers.

This change would have tangible benefits especially for younger and even middle-aged employees not fortunate enough to be in a defined benefit fund. Their super is now tied up totally untouchable till at least age 60 even if made redundant. Their defined benefit colleagues fare much better receiving both more generous benefits and by having access to all or the largest part of their super at any age when made redundant.

At current marginal tax rates, a 5.9 per cent salary increase would boost take-home pay by between 3 and 4 per cent of gross salary and markedly improve their ability to acquire and pay off a home. With the increasing incidence of redundancy and a more mobile work force, having a lower mortgage places the employee in a superior financial position to having more in super.

All employees now have the option to salary sacrifice additional money to super with the assistance of their employer. Alternatively, they will be able in the future can make personal deductible personal super contributions on top of their employer's super later in life.

Almost all private sector employers generally allow their employees maximum flexibility to structure their remuneration packages to suit their personal needs. In stark contrast, current public service practice is largely unchanged from the situation where employees had a job for life and silver plated retirement benefits.

The unions helped new public sector appointees by negotiating an employer super contribution of 15.4 per cent of salary because the employer on-cost of the defined benefit fund being closed to new entrants was far higher. But since then, while the value of defined benefit super has continued to increase, tougher super regulations and housing affordability pressures have reduced the value to many employees of employer accumulation fund contributions.

Being able to substitute more pay for less super would help rectify this situation.

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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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