The original versions of super were defined benefit pensions. When you worked for the state or federal government or a company for 40 plus years they paid you a benefit of a percentage of your salary when you finished working for the rest of your life to thank you for your service.
There is no account balance with a defined benefit pension, once you have made the choice to receive a pension that is all you get. There is often the option to have a reversionary pension where say 66% of your pension can continue to be paid to your spouse upon your death.
The reason these are popular is it takes away the risk of running out of money. Essentially the Company takes on the investment risk rather than the individual.
You have certainty of a regular income for the rest of your life. A reversionary pension may also provide security for your spouse, in that they have a regular income for the rest of their life as well. The fear most pensioners have with their superannuation balances, is do I have enough? Will I run out of money? The comfort and security of these pensions is hard to put a monetary figure on.
The disadvantages include the fact there is no asset to pass on, the pension dies with you or your spouse. The risk then is if you die prematurely your asset goes with you.
The other disadvantage is the lack of flexibility, you are unable to access any lump sums if you needed for an emergency, upgrade of car etc.
If you are lucky enough to be in one of these old schemes you would know more about it. The reason they are not offered now is the administration headaches for a company, the risk of finding the money to pay all these pensions, and we are living longer so they have become non efficient for the government or businesses to keep offering.
If you wish to obtain further information on your defined benefit plan or have any questions regarding this please give the staff at Ritchie Advice a call, we would be more than happy to help.
This advice may not be suitable to you because it contains general advice which does not take into consideration any of your personal circumstances. All strategies and information provided in this article is general advice only.
Ritchie Advice Pty Ltd ABN 12 150 128 448, is a Corporate Authorised Representative 408050 of Dover Financial Advisers Pty Ltd, Australian Financial Services Licensee No. 307248.
