A defined benefit superannuation fund is a type of super fund where the retirement benefits are predetermined based on a specific formula, rather than being directly linked to investment returns. Unlike accumulation funds, where retirement savings depend on investment performance, defined benefit funds provide more certainty for members regarding their retirement income.
How Defined Benefit Super Funds Work
Defined benefit funds calculate the final retirement benefit using factors such as:
- Final average salary – Often based on an employee’s earnings over the last few years before retirement.
- Years of service – The longer an individual has been a member of the fund, the higher the benefit.
- Contribution rate – Some defined benefit funds require employee contributions, while others are fully funded by employers.
The retirement payout is typically in the form of a lump sum, pension, or a combination of both.
Key Differences Between Defined Benefit and Accumulation Super Funds
Feature | Defined Benefit Super Fund | Accumulation Super Fund |
Benefit Calculation | Based on a formula considering salary and years of service | Based on total contributions and investment earnings |
Investment Risk | Employer or fund bears investment risk | Member bears investment risk |
Retirement Certainty | Provides a more predictable retirement outcome | Retirement balance fluctuates with market performance |
Common in | Public sector, large corporations | Most modern super funds |
The majority of Gen Y’s and younger are likely to be in an accumulation fund. In an accumulation fund, contributions are made into their super fund, the money is invested in shares and other investments, and the total balance of their super is dictated by how well the investments perform.
During the GFC, most Gen X’s and older, having an accumulation fund like Australian Super and CBUS, would have had their super balances impacted as the value of their investments nosedived. Whereas those in a defined benefit fund would have had no impact to their balances during the GFC as their super balances are dictated by the 3 dot points in the previous paragraph. An SMSF accountant Melbourne, like Nobel Thomas, will be able to explain the differences – we’re only a phone call away.
Key Differences Between Defined Benefit and Accumulation Super Funds
Pros:
- Predictable Retirement Income – Members have clarity over how much they will receive upon retirement.
- Lower Market Risk – Members are not directly exposed to investment fluctuations.
- Employer Contributions – Employers often contribute a significant portion of the benefits, sometimes more than in accumulation funds.
Cons:
- Limited Access – Defined benefit funds are generally closed to new members, with most modern funds being accumulation-based.
- Complex Exit Rules – Some funds have strict conditions around withdrawals and rollovers.
- Potential Underfunding Risks – In rare cases, funds may not have enough assets to meet obligations, although government regulations aim to prevent this.
Are Defined Benefit Super Funds Still Available?
Defined benefit funds were once common, especially in government and large corporate sectors. However, due to the cost and complexity of managing them, most employers have transitioned to accumulation funds. Existing members in defined benefit funds often retain their benefits, but new employees may not have access.
Taxation and Defined Benefit Super Funds
In Australia, defined benefit pensions may have different tax treatments depending on factors such as age and the type of pension received. For retirees aged 60 and over, defined benefit income streams are generally tax-free up to a certain cap, with excess amounts subject to tax. Our suggestion is to contact an SMSF accountant Melbourne (or a business accountant) to explain the taxation treatment.
Final Thoughts
A defined benefit super fund offers financial certainty for retirement, making it an attractive option for those who are eligible. However, the decline in their availability means most new employees must rely on accumulation super funds. If you have access to a defined benefit fund, it’s crucial to understand how it works and seek financial advice to maximise your retirement benefits. A good investment of your time will be to contact a SMSF accountant Melbourne (or business accountant) to explain the differences.
