Are you maximising your super benefits?
Several questions after last week's column on the value of public sector superannuation benefits illustrate the risks of not paying attention to the details of your employer's super scheme. An excellent example concerns the benefits of contributing after-tax dollars as a member contribution to the Public Sector Superannuation and Commonwealth Superannuation Scheme defined benefit funds.
Not contributing means more money in your pocket to spend or invest elsewhere. The extra money could go towards paying off a mortgage, gain tax advantages from negative gearing or be salary sacrificed as pre-tax dollars to a second fund. But both the CSS and PSS have costly traps for those who do not contribute.
For many years, the CSS forced members to contribute 5 per cent of their salary after tax as a condition of fund membership. More recently, the government dropped the requirement for CSS members to contribute without reducing the employer benefit for people retiring from the fund.
On the surface, this appeared to be a major improvement for members, but there was a money-saving sting in the tail. Not contributing the basic 5 per cent contribution to the fund reduced the preservation pension benefits for the many public servants who leave before 55 or obtain a redundancy benefit after that age.
The clear message for all current CSS members is to be sure that ceasing contributions does not reduce their employer benefits from the fund. The PSS, which replaced the CSS in 1990 for new employees and for CSS members opting to switch funds, is even harsher on members who choose not to contribute or make only a small contribution.
The PSS was designed to provide larger matching employer benefits for contributions above 5 per cent of salary up to a maximum of 10 per cent of salary. This proved to be a successful way of reducing the budget costs of the PSS. Nevertheless, PSS members were and are still able to obtain attractive returns from contributing the maximum 10 per cent of salary.
Compared with paying off a mortgage, where the annual return is a tax-free interest saving of about 5 per cent a year, contributing an additional 5 per cent of salary to the PSS doubles the value. It also allows access on retirement or redundancy to a larger indexed pension benefit. While it may seem attractive for PSS members to pay off their mortgage as quickly as possible, maximising their member contribution is a better option.