On separation from the Defence Forces the payment of benefits from the MilitarySuper scheme may be the first time that many people have a substantial cash/pension asset at their disposal. How substantial that sum will be depends upon a range of factors including years of service and pay level.
While the thought of planning for retirement is distant when in your twenties and thirties it is nevertheless the ideal time to start saving – to allow funds to grow over time into a substantial ‘nest egg’ – and this is particularly important now, as current superannuation rules provide for generous taxation advantages when withdrawing funds under Transition to Retirement provisions and Retirement Income.
From a retirement perspective, an informed knowledge of MilitarySuper benefits is important because both the MSBS and the older DFRDB scheme available to Defence personnel provide maximum benefits to those with long-term ADF service. These benefits reduce markedly with shorter periods of service. Knowing the potential financial outcomes – benefits and penalties – may make the difference between leaving the Services or continuing on to take advantage of long-term MilitarySuper benefits.
Most financial experts would advise people to be wary about taking the quick ‘bag of cash’ and then working out what to do with it. Indeed, knowing the extent and provisions for such entitlements can be a significant factor in any decision to leave the Defence Forces. It’s too late after discharge to realize that you could have been much better off financially by staying on until a more favourable time of departure.
While some may consider the Super ‘grass is greener’ when looking at other funds being offered, and hearing the advertising hype that surrounds such funds, the fact remains that compared with other retail and industry superannuation funds, MSBS is a very generous scheme in terms of employer (Department of Defence) contributions, retirement benefits and life-long pension entitlements.
At present, most employers contribute nine per cent of salary on their employees’ behalf to a super fund of their choice but he employer contribution into MSBS for Defence personnel ranges from 18 per cent of Final Average Salary (FAS) for up to seven years’ service, 23 per cent for service seven to 20 years, and 28 per cent for service past 20 years.
Final Average Salary (FAS) is an average of your annual salary for superannuation purposes over a period prior to your discharge date. Members must contribute a minimum of five per cent of salary up to a maximum of 10 per cent into the MSBS fund, which grows with accrued interest payments into each member’s MSBS account. The result is that over the period of service substantial sums are paid into each member’s account. Members also have five investment strategies from which to choose: Cash, Conservative, Balanced, Growth (default strategy) and High Growth.
For long-term members, any suggestion that you are better off in another fund needs to be questioned closely, taking notice of the facts and treating any sales pitch from another super fund with healthy suspicion. Issues such as management fees, fund performance and, importantly, rollover/exit fees need close examination beyond the pitch in the glossy brochure. All financial institutions have to provide a Disclosure Statement that detail terms and conditions related to the investment and the fund. Read this carefully and always obtain independent financial advice.
When considering the investment strategy, generally speaking, the Cash and Conservative options have lower exposure to Australian and International shares investments while the ‘Growth’ and ‘High Growth’ options have a much higher investment in shares.
The ‘Balanced’ option, as the name implies, has more equal portions of conservative and higher risk investments. Returns in ‘Growth’ and ‘High Growth’ can have higher returns over time but investors should be prepared for periods of negative growth.
Members may choose the strategy that suits their investment timeframe and individual requirements. Historical data on fund performance is available on the MilitarySuper website.
The employer-contributed benefit is a defined benefit, which means that it accrues based on a formula and is not affected by the earnings of the MSBS fund. This means the entitlement is calculated at the time of discharge based on your FAS and your Accrued Benefit Multiple to determine the value of the benefit.
The employer benefit has two components, the ‘funded’ productivity and the ‘unfunded’ employer share. The ‘productivity’ is the compulsory three per cent superannuation that your employer (The Department of Defence) pays on your behalf. This benefit is paid directly into the fund and will accrue with fund earnings.
The employer share is the amount the Commonwealth Government will contribute to the benefit to make up the total employer benefit determined by the formula. As this amount is ‘unfunded’ it is paid from consolidated revenue at the time of claiming the benefit.
At or close to retirement age MSBS entitlements are very generous, especially the pension entitlements. As a general example, someone who retires at age 55 would only have to draw the MSBS pension for about 12 years to recoup the whole employer-contributed benefit through their maximum CPI-indexed pension, and then that indexed pension would be paid for the rest of his/her life. Lump sum benefits for rollover or personal management are also substantial.
The MSBS Scheme is not a traditional Super scheme, it is primarily a Retirement Scheme, which attracts maximum benefits as the member approaches 55 years of age – at which time they can take the employer-contributed benefit, roll it over into another fund, or convert all or part of it to a pension. That Defence personnel can access their Employer Benefit as a pension at the age of 55 is also an advantage.
One point of contention with the Scheme, however, is that it does not operate as a classic superannuation fund for members who resign before age 55. Although members benefit from the generous levels of employer-contributions during their service the employer share remains within consolidated revenue following discharge and grows only at the CPI rate until the funds can be accessed at age 55 as a cash benefit or rolled over into another fund. The Productivity component of the Employer Benefit is funded and earns interest at the fund return rate. Only the member-contributed funds may be withdrawn, rolled over or left in MSBS to grow as a ‘superannuation’ investment when the member leaves the Defence Force.
MSBS advantages as a retirement scheme need to be considered, therefore, in the context of any decision to leave before age 55.
There’s no doubt that while MSBS ‘looks’ like a superannuation fund, with investment strategies for member contributions, beyond that MSBS is unique in its operation and method of determining benefits. For those who stay long-term the benefits are virtually unmatched in comparison with other super funds. The criticism from Service personnel, however, is that the Scheme does not provide enough flexibility for those who may spend 10 to 15 years in the Defence Forces but will have a large portion of their entitlement locked up for a long time not earning interest beyond CPI adjustments.
Members may make personal contributions, salary sacrifice amounts and spouse contributions and may transfer amounts from other schemes into MilitarySuper. Ancillary contributions will accrue as a separate accumulation interest within the MSB Fund and fluctuate in line with returns achieved by the Fund. These contributions do not attract or add to the employer benefit.
However, the amount you can salary sacrifice into Super under concessional taxation rates has been reduced, so contributing progressively through salary sacrifice over a number of years is certainly beneficial from a taxation perspective.
To be better informed on this very important financial aspect of working life, MilitarySuper members need to make it their business to know more about their eligibility to contribute to, and receive benefits from MilitarySuper.
Regular MSBS seminars at Defence units, the MilitarySuper website (www.militarysuper.gov.au), the MilitarySuper Customer Service Centre on 1300 006 727 plus the MilitarySuper Book available online from MilitarySuper will provide further information on the scheme.
The number of Defence personnel with entitlements under the Defence Force Retirement & Death Benefit Scheme is reducing as time goes by, with no new members able to join this scheme since 1991. DFRDB is also weighted toward long-term service in the Defence Force – members with 20 or more years of service and having reached retiring age for their rank (commissioned officers only).
Under the DFRDB Scheme, members who leave the ADF on non-medical grounds having served less than 20 years are entitled to a resignation benefit. This arrangement also applies to those who have completed 15 or more years but have not reached the retiring age for their rank. This resignation benefit is a lump sum comprising personal contributions to the scheme plus, in some cases, a gratuity. Gratuities in the form of a one-off bonus are usually payable to other-rank members who have served 12 months but less than 20 years service.
Special conditions apply to the payment of gratuities to officers. Retirement pay for officers may be reduced if they have not reached notional retiring age for rank. Special conditions apply to officers who were commissioned officers at the date they transferred from the old DFRB scheme and are deemed to be “in detriment”. This only applies to a limited number of Officers, and ComSuper will advise you upon discharge whether you are in detriment.
If you are entering some form of government employment after discharge, you may be able to elect to preserve your benefit. If this provision applies, you should find out how to arrange to effectively carry over your benefit to the new job. This option is only available to members who have not reached the 20-year mark.
In addition to your DFRDB benefit you are also entitled to a productivity benefit paid by the Department of Defence. If you are under your preservation age it must be paid into a rollover fund of your choice until you reach your preservation age and retire from the workforce.
If you have undergone a Medical Employment Classification Review (MECR) and the MECR Board has recommended that you are not medically fit for further service, you will be retired on invalidity grounds. Under these conditions, the DFRDB benefit you will receive is independent of any compensation or Department of Veterans’ Affairs benefit to which you may be entitled but it will impact on the amount of compensation payable.
Benefits are payable to your eligible dependants as a pension or to your estate as a lump sum in the event of your death. All DFRDB benefits are subject to taxation dependent upon individual circumstances, such as the amount of pre-1983 service you may have.
The exact entitlements to MSBS and DFRDB benefits depend on several factors, so consultation with the relevant Defence authority, Defence Instructions and MilitarySuper is vital to knowing how your particular circumstances affect your entitlements. This will also provide the information you need to make informed decisions about the best superannuation package for your circumstances.
For example, both the MSBS and DFRDB provide for benefit to families in the event of invalidity and death of a member, which are inherent to each scheme. Details are available through the hotlines, website or by contacting MilitarySuper.
Editor’s Note. This article aims to discuss some of the issues inherent in both schemes and Military Super generally to give Defence personnel have an idea of the main points of each scheme. It is not meant to be an authoritative source about particular aspects of the schemes, and the views expressed are not necessarily those of the Military Super Board.