Difference Between Accumulation and Defined Benefit Super Funds

Accumulation vs Defined Benefit Super: What Is the Difference?

Accumulation vs Defined Benefit Super is an important distinction for Australian workers to understand, especially when considering retirement planning, fund choices, or whether to move between different types of super funds.

Most Australian workers have a superannuation fund into which their employer makes monthly or quarterly deposits, as well as the option for the worker to make contributions themselves.

There are two primary superannuation fund types: defined benefit funds and accumulation funds. This article looks at the differences between these types of funds, how they work, and what they may mean for your retirement benefits.

How Super Funds Work in Australia

The main purpose of a superannuation fund is to build a pool of savings for retirement. Understanding how super funds work can help you make better decisions about your superannuation retirement savings and future entitlements.

Employers need to make super guarantee payments, which are a legislated percentage of the employee’s wages. Some employers will also offer higher contributions as part of a salary package, employment contract or enterprise agreement. You should seek legal advice if your employer is not meeting its statutory requirements in relation to super guarantee payments. You can learn more about this in our blog, “My employer hasn’t been paying my superannuation guarantee”.

In addition to the super guarantee and any top up payments made by your employer, fund members can also make their own contributions, which are capped in a financial year. Such “personal contributions” have significant tax saving opportunities. If your spouse is not working or is a low-income earner, you can also contribute to their superannuation account with additional tax saving opportunities.

The type of fund the worker has will determine how their benefit is paid when they retire.

What Is a Defined Benefit Super Fund?

Defined benefit super fund arrangements are a dying breed. Most that are still in existence relate to public sector or large corporate funds. Some examples of current corporate defined benefit funds include TelstraSuper, QANTAS Super, QSuper and Australia Post Super. Unfortunately, they do not accept new members.

How much your benefit is worth in retirement is “defined” by the rules of the fund itself and depends on the following:

• How much money your employer has to contribute based on your earnings;
• How much extra you contribute yourself;
• How long you have worked for your employer, and
• Your salary level when you retire.

For example, after 30 years of holding a defined benefit fund, your retirement benefit might be worth:

• Five times your final salary as a lump sum, or
• 80% of your final salary as a monthly payment until you die.

For many defined benefit fund members, the payments upon retirement can be significantly better than an accumulation fund. If you are considering changing from a defined benefit fund to an accumulation fund, it is crucial that you seek professional advice before you take that step.

Once you get out of a defined benefit scheme, you cannot get back in. If you are unsure whether you will be better off by moving, we suggest you do not, at least not before receiving advice. Defined benefit funds are extremely generous when considering the benefit available at retirement.

What Is an Accumulation Super Fund?

Most Australians have an accumulation super fund. The idea is that your money grows, or “accumulates”, over time, similar to a savings account with a bank. The value of your super in an accumulation fund depends on the following:

• How much money your employer has to contribute based on your earnings;
• How much extra you contribute yourself;
• How much your fund earns from investing your money;
• How high any fees are that you are being charged by your fund, and
• The type of investment option you choose for your fund.

If a profit or return is made on the funds invested on your behalf, it is added to your account balance. Unfortunately, any investment losses are also deducted from your account balance. Accumulation funds perform optimally when contributed to over a long period of time. Profits and losses can be somewhat volatile over short periods of time but are often evened out when the fund’s performance is considered over a longer period.

Choosing a Super Fund and Investment Option

Most funds allow members to choose the way their money is invested. Choosing a super fund or investment option can affect your long-term retirement position, so it is important to understand the risks, fees and investment approach.

When you are young, you may choose a more aggressive investment portfolio as you have the time to weather the market’s ups and downs. As you age and approach retirement, you may choose to have a more balanced, or even conservative, investment portfolio. There are also options to choose, for example, a “green” investment fund or to expressly forbid your super fund to invest your money in certain ventures.

In an accumulation fund, you bear the risk of profits and losses. The timing of such profits and losses can significantly affect your super payout upon retirement.

For example, if you are retiring at a time that funds have performed well over the last few years, the balance of your fund paid out to you will be comparatively good. On the flip side, if the fund has performed poorly over the 2 to 3 years before your retirement, for example, as funds did during the global financial crisis and in the early days of the COVID pandemic, your balance may be eroded, delivering you less retirement income.

Accumulation vs Defined Benefit: Which Super Fund Type Is Better?

There is no single answer to whether one fund type is better for every worker. Accumulation vs defined benefit comparisons depend on the fund rules, your age, salary, years of service, investment performance, fees, retirement timing and personal circumstances.

For many workers, defined benefit arrangements can provide generous super fund retirement benefits because the final benefit is calculated under the fund rules rather than solely on investment performance. However, accumulation funds offer more common, flexible arrangements and may suit workers who want investment choice and portability between employers.

If you are considering moving from a defined benefit fund to an accumulation fund, it is important to seek professional advice before making a decision.

Get Help From a Superannuation and Insurance Lawyer

It is always recommended that you take an active role in managing how your superannuation fund invests your money. Remember, most funds allow members to choose the way their money is invested. If you are unsure about your options or what type of portfolio would best suit your needs, you should contact your super fund or financial advisor for advice.

If your question relates to unpaid superannuation, superannuation insurance claims, TPD insurance, income protection or a dispute with a fund, Hall Payne Lawyers may be able to help you understand your legal options.

Contacting Hall Payne Lawyers

You can contact us by phone or email to arrange your consultation, either face-to-face at one of our offices, by telephone or by videoconference consultation.

If you need legal advice about Australian super funds, unpaid super, fund disputes, TPD insurance or insurance claims connected to your super, our team can help. Understanding Accumulation vs Defined Benefit Super can also help you ask better questions before making decisions about your retirement benefits.