From 1 July 2016, new entrants to the ADF will no longer be eligible to join the Military Superannuation Benefits Scheme (MSBS). You’ll now become a member of a new ADF Super scheme, and be eligible to exercise super choice.
The new ADF Super scheme is what’s called an accumulation, or defined contribution scheme. This is significantly different from the MSBS and its predecessor DFRDB, which were largely defined benefit schemes.
As an accumulation scheme with a very high 16.4% employer contribution rate, there are a number of questions this might raise for your personal financial planning.
This article considers some questions that the new ADF Super may pose for your wider financial plans.
Do I need to make additional salary sacrifice contributions?
Both employer and salary sacrifice contributions are what’s known as a concessional contribution. In the 2016-17 financial year, the concessional contribution cap is $30,000 if you’re under age 49, and $35,000 if you’re over age 49.
You might find that a significant portion of that cap is already taken up by the compulsory employer contribution.
You should also review how much super the compulsory 16.4% contribution will see you accrue – for a long-term career in the ADF this may see you accumulate enough super savings for your retirement already.
Should I consider a spouse contribution split?
Did you know that you can split up to 85% of your concessional contributions to your spouse’s super?
If you have a spouse who is receiving the minimum employer superannuation guarantee of 9.5%, compared to your own 16.4%, you could end up with large imbalances in your super accounts.
A spouse contribution split doesn’t cost anything through most super funds, so can be a great way to keep your spouse’s super account growing while they’re out of the workforce, or on unpaid parental leave.
Which investment option is right for me?
In an accumulation super fund, you need to pick the investment option that you want for your retirement capital.
If you pick a higher risk option, you need to be prepared for years with negative returns. If you’ve built a large amount of capital in your super, a bad year on a balanced portfolio could see a $50,000 drop in your funds so it’s important to make sure you’ve thought about this in advance.
How do I draw regular income from my capital once I do retire?
In the old defined benefit schemes, members had the option of converting to a lifetime pension when they reached their retirement age.
In an accumulation scheme, you have a range of options such as:
- Making a lump sum withdrawal
- Purchasing an annuity from a commercial provider
- Commencing an account-based pension
If you’re not familiar with how these options work you could research these online or consult with a financial planner.
How do I want my super to be distributed if I pass away?
As an accumulation super scheme, you will be able to nominate your beneficiaries subject to the superannuation rules.
With an employer super contribution of 16.4%, it’s likely that after even just a few years in the ADF your super will be a significant portion of your assets.
Your will doesn’t by default cover how your superannuation will be paid if you pass away, so you should consult with your fund and make sure your super is included in any discussions with a lawyer when drawing up your will and powers of attorney.
How much retirement capital will I need, and how long will my superannuation last?
Lifetime pensions from the defined benefit super schemes sometimes made the question of “how long will my super last?” pretty easy to answer – because the pension just kept being paid as long as the recipient was alive, and two-thirds were paid to a spouse or partner for his or her lifetime as well.
Under an accumulation scheme however you’ll need to figure out yourself how much you need to build in your super, and how long this will last. You can do this yourself using online tools such as those found on the ASIC MoneySmart website, or you can consult with a financial planner for a personalised plan and projections.
Should I exercise fund choice?
Under the new ADF Super arrangements, for the first time you will have choice of super fund. While choice of fund brings great freedom, it also means the responsibility rests solely with the member as to whether they’re making a good choice. If you’re unsure of whether choosing a fund other than the default ADF Super is good for you, you can research funds by reading their Product Disclosure Statement, or you can seek advice from a licensed financial adviser (there are many available through the ADF Financial Advice Referral Program).
What if super access rules change, but military retirement ages don’t?
There’s no doubt that with the high level of employer super contributions for members of the ADF, many will build significant wealth in the superannuation system.
An important consideration for your wider personal financial planning however is making sure you’re able to access that money at the right time.
You should consider whether it’s necessary to also build some wealth in your own name, in case superannuation access laws change in the future, but military retirement ages don’t. If not planned for adequately, this could leave you with the situation where you have enough money, just not access to it at the right time.
About the authors
Lee Bowden is the principal of MLC Advice North Lakes. He holds qualifications in Civil Engineering, Commerce and Financial Planning. Lee also brings 15 years’ experience as a military officer to his practice as a financial planner.
Lee credits his military training and experience for the ability to look at a complex situation, commit to a solution, and then design a system or process to execute that solution.
Michael Miller is the principal of MLC Advice Canberra. His career started working at Defence in civilian finance roles, before moving to ComSuper, providing information on the defined-benefit super schemes for members of the Australian Defence Force.
Michael regularly contributes to articles on financial issues and has been quoted or published in the Australian Financial Review, Money Management, Financial Planning Magazine and academic journals.
Both Lee and Michael are members of the ADF Financial Advice Referral Program.