Vic. Govt. Super – ESSSuper (GSO) Revised Scheme:
If you leave the ESSSuper Revised Scheme prior to your 55th birthday you are deemed to have resigned. If you leave on or after your 55th birthday you are deemed to have retired.
Revised Scheme benefits arising from resignation are different from those arising from retirement because they are covered by separate rules.
In the event of resignation a member becomes entitled to a refund of contributions with interest and a preserved, deferred pension benefit with options to commence pension from age 55, convert it to lump sum or defer it beyond age 55.
By comparison a member retiring at age 55 becomes entitled to a defined benefit pension determined by years of service and final average salary, but cannot receive a refund of contributions and interest.
While it does not seem logical that a member of the ESSSuper Revised Scheme can derive a greater superannuation benefit by resigning prior to age 55 rather than retiring at age 55 or beyond this is often the case. Any member who is approaching age 55 and considering retirement should review their situation.
Planning your income and capital strategy for retirement should start early. One of the initial issues to be addressed is your level of benefits, and whether resignation or retirement best serves your objectives. Differences in the way the benefit rules for resignation and retirement operate mean that a member can experience a substantial financial disadvantage by retiring on or after their 55th birthday rather than resigning a short time before.
The greatest differential we have seen arose in the case of a teacher who was eligible for an additional lump sum benefit of $180,000 by choosing to resign rather than retire two days later, while additional benefits in the range of $130,000 to $150,000 are common.
It must be emphasised that the comparison of resignation and retirement benefits is complex and involves different issues for different people.
Only a proportion of members can derive a financial benefit from the resignation option.
Some of the issues which influence the situation are:
¨ Contributions and Interest: The accumulated value of your contributions and interest is critical in determining whether you will benefit from resigning rather than retiring.
¨ Superannuation Salary: The rate at which your salary has increased and how recently it has increased will influence the relative benefits of resignation and retirement.
¨ Final Average Salary: The introduction of salary averaging rules for the ESSSuper Fund can make the timing of retirement important.
¨ Historical Salary: Members with an historical superannuation salary higher than their current superannuation salary may be disadvantaged by continuing.
¨ Prior Service Entitlement: In some cases the benefits of Prior Service Entitlement can be lost if a member resigns. A substantial loss of pension can result but it can depend on when prior service entitlement was sought and was recognised. In other cases application for recognition of prior service can be lodged and service purchased in the run up to age 55 with improved ESSSuper pension benefits locked in for life.
¨ Length of Service: The amount of time you have already been in the fund is an important factor. For long serving members continuing to contribute may confer very little additional benefit.
¨ Opportunity Cost: There can be a cost in receiving the same benefit later rather than sooner.
¨ Age Pension: The choice of resignation or retirement options can affect the level of future entitlement to part Age Pension and any future option to convert some ESSSuper pension to lump sum at age 65.
¨ Contract Teaching: Exercise of the 54.11 option followed by a teaching contract can provide a major opportunity to build an additional pool of retirement capital after age 55. The combination of ESSSuper pension and contract teaching income provides two incomes and generates the option for a high level of tax efficient salary sacrifice to superannuation thereby building an additional capital pool for retirement. The commencement of a transition pension while on contract after age 55 can further enhance the efficiency of this approach.
Some members who have come to see us have received poor advice from other sources particularly relating to commutation of pension to lump sum on resignation.
A member resigning, and receiving a refund of contributions and interest, also has the option of commuting up to 30% of their remaining age 55 pension to additional lump sum or alternatively the whole of the pension to a lump sum.
Only in rare situations are members resigning at 54.11 best served to commute part of the age 55 pension to additional lump sum. Members should be wary of advice which proposes that they commute any or all of their pension.
Information published is of a general and summary nature only and is neither represented as being, nor is intended to be, personal advice on any matter. No person should act on the basis of the information contained herein but should seek appropriate professional advice based upon their own personal circumstances.