Defined Benefit Scheme Advice

Overview

Defined benefit superannuation schemes are increasingly rare in Australia, but for the public sector employees, teachers, nurses, police officers, and long-serving corporate employees who hold them, the decisions made at retirement about how to take the benefit rank among the most consequential financial choices of their lives. These decisions are largely irreversible.

Details

Peter White Financial Planning provides defined benefit scheme advice from Level 57, 25 Martin Place, Sydney CBD. Peter holds a Master of Applied Finance, has 25 years of experience in financial services, and advises on the retirement decisions associated with both public sector defined benefit schemes and corporate defined benefit arrangements.

Additional Information

A defined benefit scheme pays a retirement benefit calculated by formula rather than by account balance. The formula typically incorporates years of service, a benefit accrual factor, and the member's final salary or average salary over a specified period. The result can be taken as a pension, a lump sum, or in many cases a combination of both.

More About This Service

A defined benefit pension provides a guaranteed income for life, indexed in most government schemes to inflation or to a specified percentage. It cannot be outlived. It requires no investment decisions. It protects against the sequence-of-returns risk that affects account-based pensions. Its limitation is that once the benefit is taken as a pension, the capital cannot be accessed, which affects estate planning and flexibility.

Further Details

A lump sum, or the commutation of some or all of the pension entitlement to a lump sum, provides capital that can be invested, used to pay debt, or directed into an account-based pension. Whether the transfer value offered by the scheme represents fair value compared to the ongoing pension requires analysis of the commutation factors, the implied rate of return, and longevity assumptions built into the scheme's calculations.

Overview

The interaction between a defined benefit pension and the Age Pension is different from the treatment of account-based pensions. Defined benefit pensions are assessed under the income test using a deductible amount, which reduces the assessable income figure, but they do not have an asset value assessed under the assets test in the same way as other financial assets.

Visit Main Website Contact Us

Frequently Asked Questions

Defined Benefit Scheme Advice5

Peter White Financial Planning provides specialist defined benefit scheme advice from Sydney CBD. Peter advises on the retirement decisions associated with public sector and corporate defined benefit schemes, including the choice between pension and lump sum, commutation decisions, and the interaction with the Age Pension and other assets.

This is one of the most consequential financial decisions a defined benefit member will face, and the right answer depends on individual circumstances. A pension provides guaranteed income for life with no investment risk. A lump sum provides flexibility, access to capital, and estate planning advantages. The relative merits depend on longevity expectations, other assets and income sources, debt position, estate objectives, and personal preference for certainty versus flexibility. Peter White models both scenarios with detailed projections before advising.

Commutation converts some or all of a defined benefit pension entitlement into a lump sum. Commutation factors, which determine the exchange rate between the pension and the lump sum, vary between schemes. A commutation might make sense to pay down a large mortgage, fund a specific capital need, improve Age Pension eligibility by reducing assessable income, or address an estate planning objective. Whether it makes financial sense requires analysis of the specific commutation factors offered by the scheme.

Defined benefit pensions are assessed under the Age Pension income test differently from account-based pensions. They are assessed as income using a deductible amount, which reduces the assessable income figure. They do not generate an equivalent asset test value in the way that financial assets do. The net effect on Age Pension eligibility depends on the pension amount, the applicable deductible amount, the member's other assets and income, and whether they are assessed as a single person or as part of a couple.

A transfer value is the lump sum equivalent offered by a defined benefit scheme for a member who chooses to roll their entitlement into an accumulation superannuation account rather than take the scheme pension. Assessing whether the transfer value is fair requires comparing the present value of the ongoing pension at realistic discount rates against the offered lump sum. Peter White conducts this analysis as part of defined benefit retirement advice.