When Australians start working, they usually become members of an accumulation superannuation fund. But 40-plus years ago, many of those who were lucky enough to get super from their employers at all started on a defined benefit fund.
While defined benefit funds are no longer open to new members, some Aussies who are nearing retirement are members of those funds – and here we explain the difference between the two types of superannuation funds.
The difference between defined benefit and accumulation super funds
A defined benefit plan is a type of retirement plan that local government bodies, certain water authorities and other government and semi-government authorities offered to employees before 1994. It closed to new members on 31 December 1993.
This means that today, only those who were employed by a relevant authority before 1994 and who have remained employed by them ever since are members of this type of plan.
An accumulation fund, which is the most common type of super today, is a type of superannuation plan where your employer contributes a set percentage of your salary into your super account, and you are responsible for investing and managing your retirement savings.
You also have power over how much money you would like to contribute, by using the salary sacrificing option or by contributing extra cash to your fund.
The benefits and disadvantages of each fund type
Defined benefit plans
Defined benefit plans offered retirement income certainty. Back in the 1980s and before, your employer promised to pay you a specific amount of income based on a predetermined formula that took into account factors such as your salary, years of service and age. This meant that your employer guaranteed you a fixed income for life.
Your employer bore the investment risk, and you didn’t have to worry about where to invest your retirement funds.
However, the downside of a defined benefit plan is that it was not flexible. You had no control over the investment of your retirement savings and you couldn’t choose where to invest your money. This meant that you were not free to make your own investment decisions and might not have had the opportunity to grow your retirement savings as much as you would have liked.
Accumulation super funds
Accumulation plans offer more flexibility and control over your retirement funds, as you have the freedom to choose how and where to invest your savings. However, the investment risk lies with you, and the amount you receive upon retirement depends on how well your investments perform.
Engage a professional advisor to understand your options
Whether you are in a defined benefit fund or an accumulation fund, they can be complex and hard to understand.
Understanding the fund that you are on and how that impacts your retirement will enable you to make informed decisions.
At First Financial, we can help you to make the most informed decision in your countdown to retirement. If you need more clarity about your defined benefit or accumulation super fund, contact one of our advisors today.
