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Public Sector Informant : PSI - August
24 THE PUBLIC SECTOR INFORMANT [AUGUST 2010] [SUPERANNUATION:DARYL DIXON] Two nest eggs makes a super savings recipe Spouse splitting PSSap's trustees are preventing couples from maximising their retirement savings In stark contrast to many other accumulation funds, PSSap does not offer spouse-splitting arrangements to its members Several readers have criticised the Informant's focus on the inequities that affect defined- benefit fund members while ignoring the superannuation issues faced by the tens of thousands of public servants employed after July 1, 2005, when the federal government closed off entry to these older funds. One issue raised by readers was that even though new employees can nominate the super fund that receives their employer contributions, federal employers penalise those who decide against joining the Public Sector Super Accumulation Plan (PSSap). The penalty is a 6.4 per cent of salary reduction in the compulsory super contribution for those who opt to use other funds. Government employers must contribute 15.4 per cent of salary to PSSap but only pay the standard 9 per cent superannu- ation guarantee charge to other funds. Unsurprisingly, almost all new public servants sign up for PSSap. The 15.4 per cent contribution for PSSap is far more generous than the standard 9 per cent, but is still significantly less generous than the super benefits provided to longer- serving employees via the older CSS and PSS defined-benefit funds. For that reason alone, PSSap members have every reason to expect PSSap to offer benefits comparable or superior to those provided by other accumu- lation funds. Unfortunately, PSSap fails to do this in at least one increasingly important area. In stark contrast to many other accumulation funds, PSSap does not offer spouse-splitting arrangements to its members. This decision, taken by the fund's trustees, has and will continue to disadvantage PSSap members and, in some cases, deprive them of tens of thousands of dollars in super benefits upon their retirement. The spouse-splitting legislation introduced on January 1, 2008, gives super fund trustees the power to offer their members the opportunity to take part in spouse splitting and/or estab- lish spouse accounts. The legislation allows members of funds which offer this option to transfer, at the end of each financial year, up to 85 per cent of their tax-deductible super con- tributions into an eligible spouse account. To qualify as an eligible spouse, the spouse must be under the age of 65 and not permanently retired from the workforce. This initiative was introduced to allow couples to implement their retirement savings plans on a combined basis. Depending on a couple's personal circumstances, spouse splitting provides several ad- vantages, including allowing earlier access to benefits either as a lump sum or transition to retirement pen- sion, reducing the cost of life and disability cover for the spouse, reduc- ing tax payable before the age of 60 on pension payments and facilitating access to Centrelink benefits. Importantly, if the superannuation legislation proposed in this year's federal budget -- which restricts individuals aged over 50 to a concess- ional limit of $25,000 of their accumulated super savings if they have a super balance of more than $500,000 -- becomes law, being able to move super to a spouse account will be even more important for effective retirement planning. Even now, spouse splitting allows members with an older spouse to move up to 85 per cent of their employer contributions into the account of their partner. This allows that spouse to gain earlier access to the super benefits, either as a lump sum after preservation age or as a transition to retirement pension. Similarly, even if both partners are about the same age, spouse super splitting -- by equalising the amounts in each super fund -- can cut the income and lump-sum tax payable on pension and lump-sum payments received before the age of 60. Spouse super splitting can also help couples share their superannu- ation balances in ways that increase their combined Centrelink or veteran's entitlements at a later time. For example, increasing the super account balance of the younger partner can increase the welfare benefits of the older spouse until the partner reaches retirement age. The Informant has reviewed finan- cial models which suggest the bene- fits of splitting spouse super can build up to tens of thousands of dollars. For example, if an older spouse whose account has been built up via contri- bution splitting is eligible to begin a transition to a retirement pension from his or her fund, the income so obtained can provide the necessary income to allow greater salary sacri- fice contributions. Daryl Dixon is executive chairman of Dixon Advisory. email@example.com
PSI - September