Super is a large and important part of the remuneration of any public servant. But in the changing workplace, it’s no longer a set-and-forget investment. Your super may need adjusting as you switch between different roles and employers to ensure you are protecting existing benefits and maximising new opportunities.
Defined benefit v accumulation
Depending on when you started work in the public sector, you may be covered by an older defined benefit plan (such as CSS or PSS) or a newer accumulation fund (such as PSSap). Each has their advantages.
Defined benefit plans generally provide a pension income in retirement (though you can opt for a lump sum). This income is based on a formula that takes into account things like your service period and salary and is usually indexed to inflation.
The certainty of receiving a guaranteed income in retirement is highly attractive, but defined benefit plans can be less flexible if you’re looking for a more varied career. Members looking to leave their employer, either permanently or for a period, will need to consider how best to manage and maximise their defined benefit. With both PSS and CSS, you can preserve your membership if you leave your employer and reactivate it later — so long as you haven’t accessed your benefit. But questions such as whether you return to your employer, and the timing of your return, can impact on your final benefit. So it pays to plan any moves carefully.
Accumulation plans are simpler and more flexible. Both you and your employer can contribute, and your benefit is the total of contributions plus investment earnings. You can roll your super over into a new fund if you leave your employer (though there may be an exit fee or loss of insurance), and you can choose to take your retirement benefit as a lump sum or pension in retirement. However, unlike defined benefit funds, your account balance determines your final benefit and can be subject to movements in investment markets.
Whether you’re in a defined benefit or accumulation fund, it’s worth considering maximising your super by making additional contributions. So long as your existing contributions have not exceeded the current cap ($30,000 this year if you’re under 50, and $35,000 if you’re 50 or older), you can take advantage of the tax benefits of salary sacrificing. This simply involves asking your employer to make extra contributions to your fund in lieu of part of your salary. So instead of paying your marginal tax rate on that income, it will be taxed in your super fund at just 15%.
How much you can sacrifice depends on your existing level of contributions. Members of PSSap generally receive employer contributions of 15.4% of their salary versus the super guarantee rate of 9.5% received by most other employees. So if you are leaving the public sector, consideration should be given to at least making up this shortfall.“The situation is more complex if you’re in a defined benefit fund.”
The situation is more complex if you’re in a defined benefit fund. In short, your super is a substantial part of your remuneration and if you’re changing jobs, you will need to negotiate generous employer super contributions to maintain the status quo.
However, a common misconception is that defined benefit members still employed in the public sector are unable to salary sacrifice because of the generosity of their notional employer contributions. While it’s true that PSS and CSS employer contributions are actuarially valued at more than 9.5%, only the productivity component (2-3%) is treated as a concessional contribution under the super rules. This means many public servants have more scope to salary sacrifice than they may have realised. Your existing member contributions of 5-10% are also not counted towards the cap as they are treated as non-concessional (after-tax) contributions.
The only catch is that you can’t salary sacrifice into PSS or CSS, so you will need to open another account with an accumulation fund for this part of your super.
The special nature of public sector super may require that you have more than one super fund. While the general advice is to consolidate into a single account, public sector employees may need a second account to salary sacrifice, or to contribute to while working in other sectors.
With the introduction of the default MySuper accounts, many of the differences between retail, employer, and industry funds have blurred and most major funds now offer a quality product at low cost. (Bear in mind though, that a MySuper designation alone is not a guarantee you’re getting the best fund.)
One factor that does differentiate funds is the level of insurance cover and few funds are as generous in this regard as CSS, PSS, and to a lesser extent, PSSap. So a major consideration for public sector employees is to preserve their cover if they are changing employers, rather than simply rolling over their benefit into a new fund. Income protection insurance is a high priority, and you may need to consider purchasing this insurance separately. You may also want to consider increasing your death and total disability cover above the default in any new fund.
Some funds also offer wider investment choice, but the extra costs may not be worth it if you don’t intend to actively manage where your money is invested.