Bigger contributions are a win-win situation for lucky PSS members

The past month's world sharemarket falls highlight the good fortune of the federal government's defined benefit super fund members. While they may miss out on booming share and property markets, they completely avoid all the worry and concern when markets plunge and know that they will get all the employer benefits promised to them.

By contrast, accumulation super fund members don't know how much they'll ultimately build up in their super and savings and for them, paying off a mortgage can be more rewarding than investing in super.

The situation is quite different for members of defined benefit funds such as the CSS and PSS where their final employer benefit is related to their final salary or final average salary.

Consider the situation of a PSS member reader who queried whether it would be better to concentrate on paying off the mortgage or to contribute the maximum allowed 10 per cent of salary. Because the Commonwealth, unlike most state governments, forces members to contribute out of after tax dollars, the cost to the family budget is the same as paying off a home mortgage which also has to be paid out of after-tax income.

The return from paying off the house mortgage is the mortgage interest rate (currently about 5 per cent a year) totally tax free. But the return from making additional after-tax contributions to the PSS can be much higher.

The government's intention in introducing the PSS was to save money by providing members with the opportunity to reduce their member contributions to the fund. Over time, however, increasing numbers of members realised that doing this reduced their employer funded benefits and opted to make larger contributions to their fund.

Not only does the employer match the additional member contribution over 5 per cent of salary, the resulting benefit taken on redundancy or retirement is available as an indexed lifetime pension issued on an extremely generous terms.

Especially now that mortgage interest rates are at historically low levels and despite the high cost to the family budget, maximising contributions to the PSS provides a much higher return than paying off a mortgage.

Interestingly also with mortgage interest rates so low, taking the full indexed PSS pension at retirement or on redundancy can provide a higher return than taking the benefit as a lump sum to pay off any remaining mortgage. Among other things this avoids paying income tax on benefits taken as a lump sum and gains the benefits of the automatic half yearly indexation of the pension payment.

The situation for CSS members in making additional contributions is different because the employer benefit is maximised with only a 5 per cent of salary member contribution.

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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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