Styles of Superannuation Benefits

There are two main styles of superannuation benefits and they include both defined benefits and accumulation funds.

Defined Benefit Funds

A defined benefit fund is one that pays a retirement amount that is preset, or as the name suggests ‘defined’. This preset amount is set according to the rules outlined by the fund and typically is establish by a fund formula which multiplies the member’s final average salary based on the last few years of retirement by the number of years that they have been a member of the fund or worked for an employer. This benefit can then be either paid out as a lump sum or as a pension. This type of fund is usually for a more risk adverse investor because the member’s benefit does not depend on the performance of the fund manager but rather on the member’s salary close to their retirement.

This would mean that the employee in a defined benefit fund would receive a specific multiple of their salary at retirement according to the amount of years that they have been a member of the fund or worked for the employer. An example would include a person would was 18 when they joined a particular employer and whom retired at the age of 65. Their multiple would be 47 by 15% which would equal 47 x 0.15 = 7.05. Thus, if there final salary was $30,000 then the fund would pay 7.05 x $30,000 = $211,500. The fund may also preset the multiple figure when the person becomes employed to the company or joins the fund as a predefined rule. This would be outlined in the funds Product Disclosure Statement and would usually be written as “upon retirement, the person will receive a lump sum which is 8 times their final average salary in the last 5 years.”

These funds are in their last stages of life however, because they have proven to be quite expensive and have been found to be advantageous to certain members.

Accumulation or Contribution Funds

A accumulation or contribution fund is typically one where the member contributes funds across the entire period of their working life. These contributions are then invested on the members behalf with management fees and costs depending on the success of the funds investments. It is similar to an insurance company in that funds are pooled and invested by skilled fund managers in order to make substantial profits for its members on retirement. This is typically the most common type of superannuation fund in Australia and is also a growing area for investment professionals who are seeking to gain large profits from charging excessive management fees.