As a Financial Planner, it never ceases to amaze me how much confusion there is about Superannuation. I blame the continual and regular changes.
The [Super 101] series aims to provide some basic info that will help you understand the information that comes to you in that statement many people hardly ever read.
Knowing what sort of Super plan you have will help in your decision making.
Broadly speaking, there are two types of Superannuation plans;
– Defined Benefits and;
– Defined Contribution.
Nearly 97% of the working population have a Defined Contribution plan. That is, for every dollar they earn in their salary a defined contribution is determined for their super fund i.e usually 9% (currently).
A Defined Contribution plan is more widely known as an accumulation account.
The balance is determined by contributions and investment earnings going in and fees and insurance premiums going out.
The investment risk of a Defined Contribution plan is worn by you, the member. Hence, the importance of knowing how your Super is invested.
A Defined Benefit plan on the other hand prescribes the amount payable at retirement regardless of cost.
This could be as simple as a multiple of percentage of final years salary multiplied by completed years of service.
The investment risk in this case is worn by the employer. And, one of the reasons why 97% of eligible members are in accumulation funds.
The scariest mistake I’ve ever encountered in this area is a lady who had worked for an organisation for some 35 years.
Not understanding how her Super worked, she decided to spend her final year working just 2 days a week. So when it came time to calculate her final payout, it was based on that income and not the full time higher duties she was earning before that.
Before you make any decisions regarding your Super or retirement strategy, know what the ramifications will be. If you are worried that you don’t know enough, seek help.