Saturday, 12 July 2008

Super Splitting part 3- Accumulation Fund or Defined Benefit?

It is vitally important to know what type of fund a member spouse might have. In a case of it's not all beer and skittles, it is NOT the case of just getting an agreement, getting an order and splitting the super.It is important to know what you are splitting, as this might be vitally important to know how valuable the member's interest might be, and after getting financial advice, what is the best approach in dealing with that interest.

To recap on parts 1 and 2: Part 1 of super splitting was seeing if you were married or de facto (including same sex partners)- although this is likely to change for those de facto and same sex partners who split up if and when the proposed amendments to the Family Law Act come into force; Part 2 of super splitting was whether the superannuation fund was an Australian superannuation fund or an overseas superannuation fund.

Whilst there are a number of superannuation funds that are capable of being split, including retirement savings accounts and partly vested funds, the two most common types of funds are accumulation funds and defined benefit funds.

Accumulation Funds

Accumulation funds are the one that most of us have and are very easy concepts to understand: they are like bank accounts. They work like this: money is paid into the account, fees come out, hopefully the fund makes some money, and all things being equal - the fund grows in value. In general accumulation funds are really easy to split because, being similar to a bank account the money or value is sitting in the account and can in most cases be easily divided.

Defined Benefit Funds

These are the older type funds, commonly found with government, Qantas, and some private employers.

The numbers of members for these are much fewer, but because many of the members have been in these funds for a long time, and because they are often generous in benefits, the value of total superannuation in Australia was not too long estimated at about half the total value of super.

A defined benefit fund works like this. Somewhere, usually in the trust deed of the fund, but sometimes in legislation, and confusingly sometimes a mixture of both, the fund says that upon the happening of a certain event then the member shall be paid a defined benefit. This is often calculated by some formula based on the member's final leaving salary, but there can be bells and whistles attached, such as how long a member has been in the fund, CPI adjustments and the like. One can never be too careful in dealing with a defined benefit fund, and one should always endeavour to obtain a copy of the trust deed to work out what the defined benefits are.

There are some other features of defined benefit funds that jump out:
- a valuation should in most cases be formally obtained, although some funds such as Qsuper provide good valuations;
-these funds often have fund specific methods of valuation that have been approved, as opposed to the usual family law method of valuation. Value it on the wrong method of valuation and you might be out by thousands of dollars!;
- members who think that they are in one fund might discover that they are in fact in two. For example, a member of the Queensland public service might find themselves as a member of the accumulation fund alone, or the defined benefit fund alone, or a member of both funds;
- some defined benefit funds do not have any money or much money in them- therefore any split now cannot occur because there are no benefits to be split- they will only crystallise when the member retires- meaning that the non-member spouse may have a separate fund in that defined benefit fund until the member retires. NONE of the State and Federal schemes were fully funded, except Queensland. By virtue of the Commonwealth schemes being the largest, the Howard Government decided to ensure that these funds could be split and non-member spouses could rollover their benefits into other funds;
- it is so important to read the fine print. I cannot emphasis this enough. I had a number of clients who worked for the ATO and it is fair to say that the Comsuper fund is probably the most complex around.It not only has bells and whistles, but lights, camera and action as well. No wonder the Commonwealth quarantined it so future public servants could not join it! Depending on the method of valuation, a member's interest might vary greatly- for example between $200,000 and $1M!
-self-managed super funds are almost invariably accumulation funds. However, one I came across some years ago was a defined benefit fund. Again it is important to get a copy of the trust deed.
- there may be real benefits remaining in a defined benefit fund and splitting the accumulation fund. As usual, get good financial advice from an independent financial planner.

Next: Super Splitting Part 4- valuing the member's interest

1 comment:

Anonymous said...

Well written and balanced... I like that article writing strategy... it's one of the best reference for canvassing and studies.. thanks for sharing...