Defined benefits

Some employers provide “defined benefits (DB)” super which is different to the accumulation super most Australians have.

If you have DB super, the final benefit you receive upon retirement generally doesn't depend on investment market returns. It’s calculated by a formula determined by your employer and the super provider.

The formula used to work out your defined benefit will be set out in your plan rules, usually it is based on:

  • How long you have worked for your employer or been a member of the plan.
  • A percentage of your salary for each year of service, known as your accrual rate, which might vary depending on how much you choose to contribute.
  • Your final salary or your average salary over a number of years.

Here’s an example of someone in a DB pension fund who retires at 65:

30 (years’ service) x 1.5% (accrual rate) x $100,000 (average salary over three years before retirement) = a pension of $45,000 per year.

Most DB plans have some defined benefits that are calculated using accumulation-style accounts (e.g. on resignation) which do depend on investment returns.

Check your plan’s rules, which you can access by logging in to your account, to make sure you understand how your benefit works and whether it is exposed to investment markets or not. If you're considering changing from a defined benefit to accumulation style super, it’s worth getting professional advice. Once you get out, you usually can't get back in.

Book an appointment
with a Mercer financial adviser today or call us on 1800 682 525.

Contributing to your defined benefit

Most DB plans require you to contribute a minimum percentage of your salary and some allow you to make additional voluntary DB contributions; either before or after-tax. Your final defined benefit might vary according to the percentage of salary you choose to contribute.

Your employer contributes to the plan to fund the defined benefits as a whole, not to fund each member individually. So your plan to uses a formula to work out the value of DB contributions counted against your individual contributions cap. These are your “notional taxed contributions”.

Most DB plans also allow you to make voluntary contributions to an accumulation account in addition to your defined benefit.

Contribution caps

You can put as much money as you like into your super, but there are limits on how much you can contribute before you pay extra tax. There are different limits, or contribution caps, depending on whether the contributions are made before tax (concessional contributions) or after tax (non-concessional contributions).

Concessional contributions caps

For 2017/18, a concessional contributions cap of $25,000 applies for everyone. 

For more information on contribution caps, go here.

Notional contributions and the concessional cap

Your employer plan calculates and reports your notional taxed contributions to the Australian Tax Office each financial year. That’s the DB amount that counts towards your concessional contributions cap.

It can be difficult, even impossible, to adjust your level of notional contributions, so the government introduced special ‘grandfathering’ rules to help protect eligible members from going over their concessional cap. 

Call us on 1800 682 525 to find out if you’re eligible.

Non-concessional contribution caps

Caps also apply to non-concessional contributions, which include any contributions you make from after-tax income. See here for further information.

Any contributions above the non-concessional contributions cap will be taxed at 47% (2017/18), unless you elect to have the contributions refunded, even though these contributions are made from your after-tax income; so you would effectively pay tax twice.

The regulations are complex and the consequences of going over the cap are potentially very serious, so you should plan your overall contributions strategy with care. 

Keeping track

To keep track of your concessional contributions you’ll need to monitor:

  • Your notional taxed contributions
  • Any additional employer super contributions to an accumulation account
  • Any salary sacrifice contributions you make to an accumulation account
  • Any concessional contributions to other super funds
  • Some other amounts in special circumstances - see here for further information

Book an appointment with a Mercer financial adviser today.

Feel free to contact us on 1800 682 525 with any questions and we’ll be happy to help.

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