Superannuation in Australia: Defined Benefit vs Accumulation
Jul 31st 2009, 2:01 pm
#1
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Superannuation in Australia: Defined Benefit vs Accumulation
Hi, I need to choose the type of my superannuation – defined benefit or accumulation. My superannuation fund is Unisuper and I intend to work for many years at my university and the expected salary growth is CPI + 1% per annum. Any advice? Cheers, Oleg
Jul 31st 2009, 10:48 pm
#2
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Re: Superannuation in Australia: Defined Benefit vs Accumulation
Compute the portion of your income you would be required to save to achieve the defined income at your retirement. Assume a net real yield of your investments of 3% per year and a 1% real increase in the amount you save each subsequent year.
I think it possible you will be quite surprised. Starting with no investments at 25 and retiring at 65, you would have to save 53% of your income to buildup enough capital to pay out an income equal to your final salary. Starting at 35 and retiring at 65, you would have to save 80%. Starting saving at 40 and retiring at 65 you would have to save 101% of your income. In the converse, that is why defined benefit schemes are unaffordable and have disappeared.
If you can get a gold plated cast iron guaranteed defined benefit scheme (and won't be able to increase your income faster else where) grab it and don't let go.
Jul 31st 2009, 10:54 pm
#3
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Re: Superannuation in Australia: Defined Benefit vs Accumulation
Who incidentally actually recently offered employees a choice to change from defined benefit to personal accumulation. I do wonder how many took it up...
Jul 31st 2009, 11:13 pm
#4
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Re: Superannuation in Australia: Defined Benefit vs Accumulation
Clause 34 provides a process for the Trustee to respond to prolonged market downturns and maintain the ongoing health of the DBD. Ultimately, if the Trustee considers it necessary, this Clause provides a mechanism to reduce members’ benefits.
http://www.unisuper.com.au/members/s...ion/dbd-update
Aug 1st 2009, 12:20 am
#5
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Re: Superannuation in Australia: Defined Benefit vs Accumulation
My oh was offered to change a good few years ago and did we, no we stuck with defined benefit.
Aug 1st 2009, 3:45 am
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Re: Superannuation in Australia: Defined Benefit vs Accumulation
I think it possible you will be quite surprised. Starting with no investments at 25 and retiring at 65, you would have to save 53% of your income to buildup enough capital to pay out an income equal to your final salary. Starting at 35 and retiring at 65, you would have to save 80%. Starting saving at 40 and retiring at 65 you would have to save 101% of your income. In the converse, that is why defined benefit schemes are unaffordable and have disappeared.
Last edited by JAJ; Aug 1st 2009 at 3:48 am.
Aug 1st 2009, 6:31 am
#7
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Re: Superannuation in Australia: Defined Benefit vs Accumulation
A rule of thumb
"... should aim for a retirement income of around 65% of your final salary. ..."
http://www.unisuper.com.au/download....1E64DF9A0D8278
To achieve 65% of final income, starting at 25 with nought, yield on investment 3% net real, income increasing by 1% net real; 37% of gross income would have to be saved. A little easier than ~59% savings to achieve 100% of final income.
My experience is that less than 100% of pre-retirement income would make retirement seem a disapointing anti-climax.
Perhaps an easier rule of thumb that is not as likely to disappoint is 100% of pre-retirement expenditure.
Code:
Age Yield Saved Savings Income 3.00% 58.63% 100.00% 1.00% 0 100,000 25 0 58,632 58,632 101,000 26 1,759 59,218 119,608 102,010 27 3,588 59,810 183,007 103,030 28 5,490 60,408 248,905 104,060 29 7,467 61,012 317,384 105,101 30 9,522 61,622 388,528 106,152 31 11,656 62,239 462,423 107,214 32 13,873 62,861 539,156 108,286 33 16,175 63,490 618,820 109,369 34 18,565 64,124 701,509 110,462 35 21,045 64,766 787,320 111,567 36 23,620 65,413 876,353 112,683 37 26,291 66,067 968,711 113,809 38 29,061 66,728 1,064,501 114,947 39 31,935 67,395 1,163,831 116,097 40 34,915 68,069 1,266,816 117,258 41 38,004 68,750 1,373,570 118,430 42 41,207 69,438 1,484,215 119,615 43 44,526 70,132 1,598,873 120,811 44 47,966 70,833 1,717,673 122,019 45 51,530 71,542 1,840,745 123,239 46 55,222 72,257 1,968,224 124,472 47 59,047 72,980 2,100,250 125,716 48 63,008 73,709 2,236,967 126,973 49 67,109 74,446 2,378,523 128,243 50 71,356 75,191 2,525,069 129,526 51 75,752 75,943 2,676,764 130,821 52 80,303 76,702 2,833,770 132,129 53 85,013 77,469 2,996,252 133,450 54 89,888 78,244 3,164,384 134,785 55 94,932 79,026 3,338,341 136,133 56 100,150 79,817 3,518,308 137,494 57 105,549 80,615 3,704,473 138,869 58 111,134 81,421 3,897,028 140,258 59 116,911 82,235 4,096,174 141,660 60 122,885 83,058 4,302,117 143,077 61 129,063 83,888 4,515,068 144,508 62 135,452 84,727 4,735,247 145,953 63 142,057 85,574 4,962,879 147,412 64 148,886 86,430 5,198,196 148,886
Last edited by WillBlack; Aug 1st 2009 at 6:54 am.
Aug 1st 2009, 10:57 am
#8
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Re: Superannuation in Australia: Defined Benefit vs Accumulation
Can someone explain in more details the difference between accumulation account and defined benefit account?
I had a read and defined benefit account means your payout uses a formulae including the salary you earned in the last year before preservation age x a factor x number of years you have contributed to superannuation. What about the amount saved up in there over the years you contributed to super? I assume you get that saved up amount as well?
Accumulation account doesn't have any formula, the payout you get at preservation age is just whatever is in the superannuation account after whatever fees and tax.
Which is the better option and why?
I had a read and defined benefit account means your payout uses a formulae including the salary you earned in the last year before preservation age x a factor x number of years you have contributed to superannuation. What about the amount saved up in there over the years you contributed to super? I assume you get that saved up amount as well?
Accumulation account doesn't have any formula, the payout you get at preservation age is just whatever is in the superannuation account after whatever fees and tax.
Which is the better option and why?
Aug 1st 2009, 11:20 am
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Re: Superannuation in Australia: Defined Benefit vs Accumulation
An interesting quote that I came across was: "people lucky enough to be in defined benefit super funds are really the elite of super fund members."
but, it also says: " most defined-benefit super funds are now either shut down or are closed to new members"
With the defined benefit super, what you pay in goes towards the employers costs of providing your Final salary based super, you don't get that money back aswell.
With the "accumulation account", you get back the value of what you have put in plus what it has earned, or less what it has lost.
but, it also says: " most defined-benefit super funds are now either shut down or are closed to new members"
With the defined benefit super, what you pay in goes towards the employers costs of providing your Final salary based super, you don't get that money back aswell.
With the "accumulation account", you get back the value of what you have put in plus what it has earned, or less what it has lost.
Aug 1st 2009, 11:33 pm
#10
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Re: Superannuation in Australia: Defined Benefit vs Accumulation
Can someone explain in more details the difference between accumulation account and defined benefit account?
I had a read and defined benefit account means your payout uses a formulae including the salary you earned in the last year before preservation age x a factor x number of years you have contributed to superannuation. What about the amount saved up in there over the years you contributed to super? I assume you get that saved up amount as well?
Accumulation account doesn't have any formula, the payout you get at preservation age is just whatever is in the superannuation account after whatever fees and tax.
Which is the better option and why?
I had a read and defined benefit account means your payout uses a formulae including the salary you earned in the last year before preservation age x a factor x number of years you have contributed to superannuation. What about the amount saved up in there over the years you contributed to super? I assume you get that saved up amount as well?
Accumulation account doesn't have any formula, the payout you get at preservation age is just whatever is in the superannuation account after whatever fees and tax.
Which is the better option and why?
Aug 2nd 2009, 5:00 pm
#11
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Re: Superannuation in Australia: Defined Benefit vs Accumulation
Defined Benefit and Accumulation would bring me approximately the same final benefit on retirement. I found this using the calculator at the Unisuper web-page (for accumulation I assumed a conservative investment strategy). But I like more the accumulation option. In this option my benefit will not hugely depend on my final salary and I will be able to fully benefit from market returns if they are above the expectations. Of course there is a risk of prolonged poor market returns, but the defined benefit members bear this risk as well according to Clause 34. I also like to have control on my investment strategy (ie I can choose a very conservative strategy in case of prolonged poor market returns). Is this reasonable? Cheers
Aug 3rd 2009, 12:51 am
#12
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Re: Superannuation in Australia: Defined Benefit vs Accumulation
Defined Benefit and Accumulation would bring me approximately the same final benefit on retirement. I found this using the calculator at the Unisuper web-page (for accumulation I assumed a conservative investment strategy). But I like more the accumulation option. In this option my benefit will not hugely depend on my final salary and I will be able to fully benefit from market returns if they are above the expectations. Of course there is a risk of prolonged poor market returns, but the defined benefit members bear this risk as well according to Clause 34. I also like to have control on my investment strategy (ie I can choose a very conservative strategy in case of prolonged poor market returns). Is this reasonable? Cheers
When I use the calculator:
http://www.unisuper.com.au/calculato.../UniSuper.html
step 1; birthday 1/7/1974, retire 65 years old,
step 2; "Defined Benefits Division account",
"Does your employer make compulsory contributions to your account?", yes,
"What percentage of your does your employer contribute?"; set to 3%
step 3; balance $0, $100,000 salary, rollover $0, CPI+1%
step 4; $0 contribution,
step 5; $0 lumpsum,
step 6; as per,
step 7; balanced;
step 8; projected median, $180,000 <-- due to the strangely low employer contribution rate of 3%.
Conclusion: rotten.
Back to step 2; Accumulation 1, "What percentage of your does your employer contribute?", 17%
Forward to step 6; projected median, $1,023,709 <-- due to the generous employer contribution rate of 17%.
Conclusion: inadequate.
Suggest you question to your employer:
. "Why is the defined benefit scheme so mingy?",
. "Isn't the minumum employer contribution 9%?", and,
. "What accumulation contribution rate are they offering?"
I suspect I have missed something regarding the defined benefit calculator.
In any case, $1,000,000 is not enough for a decent retirement. At 3% net real in retirement it would provide $30,000 per year. Higher retirement income would require substantial additional personal contributions.
Last edited by WillBlack; Aug 3rd 2009 at 12:57 am.
Aug 3rd 2009, 9:15 am
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Re: Superannuation in Australia: Defined Benefit vs Accumulation
Accumulation funds are also referred to as "Defined Contribution" benefits. This is because contributions INTO the fund are known. However the benefits OUT OF the fund are not - you just get whatever interest the fund earned.
Defined benefit mean your benefit OUT OF the fund is known (it's a formula linked to your salary). So it's the employers problem about how much needs to go in to meet this and any interest they might get along the way.
The decision on what will provide a higher retirement amount depends mainly on what investment returns you might get. If the fund's investment returns are "high", Accumulation Funds will pay more. You wear the risk.
If the investment returns end up low/negative, Accumulation funds will pay out less than Defined Benefits. Defined Benefits mean your employer wears the risk.
Nothing here is advice - just hoping to help explain the general landscape for those words. The actual decision is a big one!
Defined benefit mean your benefit OUT OF the fund is known (it's a formula linked to your salary). So it's the employers problem about how much needs to go in to meet this and any interest they might get along the way.
The decision on what will provide a higher retirement amount depends mainly on what investment returns you might get. If the fund's investment returns are "high", Accumulation Funds will pay more. You wear the risk.
If the investment returns end up low/negative, Accumulation funds will pay out less than Defined Benefits. Defined Benefits mean your employer wears the risk.
Nothing here is advice - just hoping to help explain the general landscape for those words. The actual decision is a big one!
Aug 4th 2009, 12:59 pm
#14
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Re: Superannuation in Australia: Defined Benefit vs Accumulation
Thanks for the explanation. My super actually allowed me to choose between accumulation or defined benefit up until a couple months back. I'm not sure if I should have chosen Defined benefit in the first place. Getting a yearly super payment equivalent to the salary at your last year of work sounds pretty good if the last year is your highest paid year.
Dec 20th 2009, 9:29 pm
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Re: Superannuation in Australia: Defined Benefit vs Accumulation
Thanks for the explanation. My super actually allowed me to choose between accumulation or defined benefit up until a couple months back. I'm not sure if I should have chosen Defined benefit in the first place. Getting a yearly super payment equivalent to the salary at your last year of work sounds pretty good if the last year is your highest paid year.
One clarification: Defined benefit pensions don't pay a FULL salary in retirement though. They pay a pension based on how many years you worked. For example the pension is:
N
----- x Final Salary.
60*
Where N is the number of years worked, and 60* is a typical 'accrual rate' (some schemes are different). Normally the maximum N will get to is 40 (ie. you worked for 40 years for the same company) which produces a pension of 66% of your final salary.
They are good as they take a lot of risk and decisions away from you but they aren't a no brainer.
