Super strategies for PSS members still apply - despite the Federal Budget changes

Melissa Coggan - Monday, June 05, 2017

Many of the super changes that were announced in the Federal Budget will come into effect on 1 July 2017. Several clients who work in the Public Service and are members of the PSS have rung us concerned about their future entitlements and the super strategies that they have in place.

Generally our advice to them is to come in and discuss their goals and needs to determine what the best strategy is going forward.  While the changes to super will have an effect, for the most part the PSS remains a generous retirement scheme. In addition, many of the strategies that we have recommended in the past continue to be worthwhile to boost retirement assets.

Accumulate super outside the PSS to boost your retirement assets
Many clients in the past have made salary sacrifice contributions into a super fund outside the PSS in order to accumulate additional retirement assets and generate a flexible Account Based Pension when they retire. The Federal Budget changes have an impact on this strategy due to the new lower limits on concessional contributions and the $1.6 million cap on pension assets.

Let’s discuss these issues separately.

Salary sacrifice outside the PSS still an option
There has always been a cap on concessional (tax deductible) super contributions. From 1 July this cap will be $25,000 for everyone who is eligible to contribute. In the past, only the Productivity component of an employer’s contributions into the PSS has counted towards this cap. However, one of the more significant announcements in the budget was that a higher percentage of cap is taken up by your nominal PSS contributions – this is based on a complex formula taking into account your income, length of service and member contribution levels. 

However, this doesn’t mean the strategy is off the table. While the amount that a member of the PSS can contribute to another fund has been reduced, it is still a worthwhile strategy to consider – particularly if you are over age 50.

Additional super outside the PSS will give you flexibility in retirement
From 1 July 2017, there will be a $1.6million cap on the amount of retirement assets that can be transferred into a pension, where investment earnings are tax free. Certain defined benefit income streams will be counted in the cap such as those that can be taken as part of a retirement benefit from the PSS. To convert these pensions to a lump sum equivalent a factor of 16 will be used. So this means that if your defined benefit pension pays you more than $100,000 per annum you will have used this cap in full. Excess amounts above the cap must be rolled back into super. This roll back is not possible with a defined benefit fund, so if you’ve reached the cap there will be additional tax applied to your income payment from the PSS.

What it also means is that if you receive an income of $100,000 or more as a PSS income, you will not be able to convert any super you have outside of the PSS into an income stream. 

However, Andrew Boulds, Senior Financial Planner from Milestone still believes that this is a worthwhile strategy. “Even though you can’t convert your super outside of the PSS into an income stream, you can still take out lump sum amounts (assuming you are older than the preservation age). Also if you are over 60 those amounts will be received tax free and the 15% tax on fund earnings is still a very attractive rate for many PSS members. So, there is still scope to incorporate both the PSS and the accumulated benefit within another super fund into your overall retirement strategy”, Andrew says. 

The main benefit of having another fund outside of the PSS is the flexibility it gives you. Andrew remains a fan of this strategy “It is so important to be debt free when you retire, so accumulating wealth in a super fund outside the PSS will give you a lump sum to help repay any debt and provide for things like one off surgeries, replacement cars, helping family members and travel”, he says.

For more information or to discuss your PSS super fund, please contact Milestone on (02) 6102 4333.

This document contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider you financial situation and needs before making any decisions based on this information. AMP Advice is a registered trade mark of AMP Limited, licensed to Milestone Financial. Milestone Financial Services Pty Ltd (ABN 68 100 591 508) is an authorised representative and credit representative of AMP Financial Planning, Australian Financial Services Licensee and Australian Credit Licensee.