3 February 2022

Commonwealth Superannuation: how a one-off decision can change your life

| Karyn Starmer
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Australian Government building

The decisions you make about superannuation today can have lifelong implications. Photo: Michelle Kroll.

Uttering the words ‘superannuation’ and then watching people’s eyes glaze over is a common experience for anyone in the finance industry. Superannuation hardly satisfies anything on the reward scale. Hidden, untouchable and associated with reams of fine print, it’s no wonder it sits way down on the ‘later’ list.

Add in the complexity of the differences between public sector superannuation schemes and almost everyone has tuned out. But superannuation and the choices you make around claiming your super are the key to how well you live your post-work life.

What makes Commonwealth superannuation so confusing and difficult to unpack is there are three separate schemes. The scheme you are in is determined purely by the date you entered the public sector workforce.

RSM Financial Services Australia financial adviser Chris Oates says it is important for Commonwealth Public Sector employees to understand the scheme they are in and how they choose to take their benefits on retirement.

“It can make hundreds of thousands of dollars difference,” Chris says.

“Unfortunately, there is no one right or wrong answer as to what choice people should make. Whether it is a pension, lump sum or a mix of both, the choice is going to be up to each individual or family circumstances.”

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The Commonwealth Superannuation Scheme (CSS) and the Public Sector Superannuation Scheme (PSS) are defined benefit schemes. The benefits come from two sources: employee and employer components, with your end position determined by your final salary plus the contributions made while you were working.

The CSS’s resignation and preservation options are widely regarded as superior to those of the PSS, but Chris says this is not strictly true, particularly if you decide to take the full benefit as a pension.

The CSS was in operation until it closed in 1990. Under this scheme, on age retirement, the employer-funded benefit does not attract an investment return. Instead, it is indexed for inflation. Funds must be left in the fund to claim the employer benefit at age 55 or on retirement.

The PSS was established to replace the CSS in 1990 and closed in 2005. The employer component of the PSS comprises employer productivity contributions, plus fund earnings, and an unfunded ‘benefit balance’, which is determined when the employee leaves eligible employment.

The PSS final benefit is calculated using the last three years final average salary, but how much a member has contributed over their membership also plays a key part.

“One common misconception is that it only matters what you contribute in the last three years before retirement. You actually need to be looking at it the whole time,” Chris says.

On retirement, PSS members can usually convert 50 per cent or more of their final benefit accrual to a lifetime indexed pension paid by the Australian Government. Any remaining balance, as well as any transfer amounts, will be paid as a lump sum.

Chris Oates

RSM Financial Services Australia financial adviser Chris Oates. Photo: Thomas Lucraft.

Unlike CSS, PSS members may withdraw their contributions if they leave the public service before they retire, but if they do, they lose their entitlement to convert the employer benefit to a pension upon retirement, they must take this portion as a lump sum. To remain eligible to draw an indexed pension at retirement, they must leave all of their benefits in the fund.

PSS members cannot access its benefit until either the age of 65 or when the member retires from the workforce.

Australian Government employees who commenced employment after July 2005 are eligible to join the Public Sector Accumulation Plan (PSSap), an accumulation plan similar to most industry and commercial superannuation plans available while you’re working or retired with the option of a lump sum benefit or pension on retirement.

Chris says the key question for people to consider with both the CSS and PSS schemes is, what are their requirements on retirement? Do you need a lump sum, or are you happy to have a pension or will a mix of both suit you?

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If a PSS member chooses to take a lump sum, they gain access to the money immediately but lose the benefits of a risk-free lifetime indexed pension.

“The advantage of receiving a pension on the PSS is that the whole pension is indexed with inflation each year. It is worthwhile asking yourself, do you have enough super that you could not only live on the pension but could you also save on that pension like a wage earner,” Chris says.

“But keep in mind, if you take the pension, on your death, a part payment of the pension will transfer to your spouse, but that pension is not transferrable to your adult children.”

Sometimes a mix of the two – a lump sum and a pension – can be a good option. An alternative is to take a lump sum and transfer it to another super fund.

But Chris warns: “You only have one shot at making the decision.”

“You can’t take a lump sum or pension and then change your mind. Ultimately it is best to get advice to make sure you are doing what is right for you and your circumstances.”

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Also not mentioned is pss members have access to a full pension on redundancy regardless of their age. I got mine at aged 48

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