Defined benefit pension plans aren’t a common feature of superannuation schemes today, but they were popular with employers before the 1990s in certain industries.
For many current-day retirees who may have worked within the public sector (such as the military) or the local government, a defined benefit super fund may have been set up to fund their retirement.
What Is A Defined Benefit Fund?
In a defined benefit fund, your retirement benefit is determined by formula instead of being based on investment return.
Most defined benefit funds are corporate or public sector funds. Many are now closed to new members.
Typically, your benefit is calculated using:
- the money put in by you and your employer
- your average salary over the last few years before you retire
- the number of years you worked for your employer
But how else is a defined benefit fund different from other super funds?
If you are a member of a defined benefit fund, you may be able to access a defined benefit pension from age 55, regardless of when you were born. However, access will depend on your fund’s eligibility requirements, which can differ depending on the provider.
Defined benefit schemes bring with them some unique advantages. This includes a guaranteed income based on set calculations (for example, a member’s final average salary and independent of investment performance), with all investment risk resting with the employer or fund.
How Can You Access Income From A Defined Benefit Fund?
Some defined benefit funds pay you a lump sum, but the older funds (now usually closed to new members) often offer a lifetime income stream. This income stream is in the form of a pension that is paid until you die and may even be paid until your spouse dies.
Depending on your living expenses and how long you live after retiring, it’s possible for your superannuation money will be used up before you die if it is in an account-based income stream/pension. However, in the case of a defined benefit lifetime pension, the lifetime pension will be paid to you as a regular income stream/pension for the rest of your life.
This lifetime pension is usually paid fortnightly throughout your life. When you die, it will often continue to be paid at a reduced rate throughout the life of a qualifying spouse.
Can My Children Access My Defined Benefit Fund If I Die, And My Spouse Is Already Deceased?
While an accumulation superannuation fund can have the balance drawn out upon the account holder’s death, a defined benefits pension can only be accessed by the account holder’s spouse (at a reduced rate).
For your children to receive anything from your defined benefit pension, it is best to receive a lump sum payment instead of a lifetime pension. It is, however, quite rare for the lump sum to be of sufficient value to make it worth cashing out your lifetime pension, and you most certainly should consult with a professional before accessing your defined benefit fund.
I Took The Lifetime Pension Instead Of A Lump Sum – Is It Too Late To Leave Anything To My Kids?
This all depends on the contract of the lifetime pension. Most of the old pensions from governments and large corporates do not provide you with the option, and as stated above, it is often not worth cashing your pension in to take a lump sum.\
Again, before choosing between a defined benefit pension or a lump sum, you should consult a professional adviser.
