Today, most Australians become members of an accumulation fund when they start their first job. But back in the 80s and earlier, your employer may have started a defined benefit for you – if you were lucky enough to get super at all!
The Vision Super Defined Benefit (DB) plan provides certain employees of local government bodies, certain water authorities and other government and semi-government authorities within Victoria. It has been closed to new members since 31 December 1993 so only people who were employed by a relevant authority before 1993 who have remained employed by an authority since that time are members.
What is an accumulation account?
Accumulation accounts generally grow or ‘accumulate’ money over time. The value of your accumulation account depends on several things including:
- How much money your employer contributes
- How much you contribute
- Whether anyone else has made a contribution for you
- The investment option(s) you choose and the net investment earnings of the investment option(s) (or the default investment option if you haven’t made an investment choice), and
- The amounts deducted from your accumulation account (such as administration fees, contributions tax and other fees/costs).
Net Investment gains are added to your account and net investment losses are deducted. As a result, you bear the investment risk of your account. When the financial markets rise, your accumulation account (based on your investment option(s)) will also rise. Similarly, when financial markets drop in value, your accumulation account (based on your investment option(s)) will also drop in value.
When you take your superannuation benefits, your benefits will equal the balance of your accumulation account.
What is a defined benefit (DB)?
Unlike an accumulation account, a DB entitlement is calculated using a formula which is set out in the relevant trust deed. For example, when you cease to be an LASF DB active member, your final DB benefit is generally calculated using the following:
Adjusted final salary x Accrual rates x Years of membership
Unlike many accumulation accounts, your DB entitlements are not directly linked to the contributions paid to the fund for your defined benefit, or to the investment returns relating to the investments that are used to pay your defined benefit. Instead, your defined benefit depends upon a number of factors including:
- How long you have been a member of the defined benefit sub-plan
- Whether you have ever worked part-time, or taken leave without pay
- Your final average salary
- Your age when you leave your employment
- The reason for leaving your employment, and
- Whether you have an offset account (such as a family law offset account) which will reduce the value of your benefits.
Unlike the balance of an accumulation account which fluctuates with the investment performance of the financial markets, your DB benefit formula does not change based on the investment performance of those markets. As a result, it is your employer carries the investment risk associated with providing you a DB benefit and not you.
There are a number of other differences between an accumulation account and a DB entitlement including:
- The insurance cover that you may/may not have
- What happens to your benefits when you die (including whether you need to make a death benefit nomination), and
- What choices you can make when you cease your employment.
Need to talk one-on-one?
Defined benefits are complex and difficult to understand but they can be valuable and can give you peace of mind about your retirement. Vision Super Financial Planners are superannuation and DB specialists and understand the intricacies of the Vision Super DB benefit and what choices are available to you. Their job is to help members plan for their retirement.
If you choose to obtain advice from a Vision Super Financial Planner, you may be charged a fee. If any fees are applicable, this will be discussed with you before any financial advice is provided. Call our Member Services team on 1300 300 820 Monday to Friday 8:30am to 5pm to set up a time.