Many PSS preserved members are considering their options to return to the public sector. Here we look at the important variables to assess.
Returning to the public service to get a better superannuation outcome for your retirement isn’t always a clearcut decision. There are many variables at play in terms of what will ultimately provide you with the best outcome financially and then there are the personal factors including overall job satisfaction and career opportunities. These personal considerations, a financial plan can’t answer for you but I can usually put a price on them. Here we look are the variables we consider when advising clients from a financial point of view.
Planned Retirement Age
How much longer you work and are a potential contributing member of PSS makes a big difference to what you’ll retire on. The PSS as a defined benefit fund rewards tenure in two ways. One, your Accrued Benefit Multiple will be higher the longer you contribute. Secondly, the age at which you retire and claim your benefit refences a Pension Conversion Factor. The older you are the lower the factor and hence the higher your PSS lifetime pension.
One scenario I often get asked though is “I can only go back to the public sector for 5 years but I really like my job in the private sector so can easily do another 8 years there, can you work out what will be better for me?” The answer is yes, I can.
Relative Salaries
The private sector generally pays higher wages particularly if you are a contractor. So what needs to be considered here, if you remain in the private sector, is what is done with the extra income. To put any comparative analysis on an even footing assumptions need to be made that the additional income is effectively used in the most optimal way. This could involve additional salary sacrifice contributions to super, concessional contributions, spouse contributions or the repayment of debt.
Remaining in the Private Sector Will Require Fiscal Discipline
As mentioned, often the benefit of remining in the private sector usually involves committing to addition wealth building strategies. If such strategies are not adhered to you may easily end up in a worse position by remaining in the private sector.
Expected Pay Increases Over Time
Your PSS retirement benefit is a function of your Financial Average Salary X Accrued Benefit Multiple. Consequently large salary increases or acting higher duties can both make a significant difference to your end PSS benefit. These need to be weighed up against expected pay increases in the private sector.
Security of Tenure
The public sector in most cases is likely to offer longer-term employment security and the potential for generous redundancy benefits in the event of job loss. The private sector, particularly if you are working as a contractor is likely to provide less employment security.
A Guaranteed Lifetime Income from PSS
The real value in the PSS lies in the ability to elect to receive a lifetime indexed pension rather than a lump sum. It is the value one can place on this lifetime pension that usually is the determining factor in deciding whether to return to PSS contributory membership. With interest rates remaining persistently low over the last two decades and expectations rates will renin low it is extremely costly to replicate such an income stream from private funds.
How is Your Health? Longevity is Important, as is Estate Planning
The PSS pension is two thirds reversionary to your spouse if you have one. If you and/or your spouse are in poor health then the benefits of taking a PSS pension may be limited as there is no residual value left to pass onto your estate. Conversely, if you have good genes and come from a family of long livers then the value of the PSS pension could be substantially more.
Estate planning and what you pass onto your estate can be influenced in several ways. Superannuation accumulation scheme values and any residual value of pensions funded by them can be passed onto the estate. However, a PSS lifetime indexed pension may enable you to be less reliant on drawing on other savings during retirement leaving these amounts for the estate.
Your Tolerance for Investment Risk
Remaining in the private sector will require you to continue to contribute to an accumulation type superannuation fund. These funds have varying levels of investment risk depending on the investment option you select. The PSS benefit however is determined by a formula and is a defined benefit fund so investment risk is removed from the equation. Generally, the higher your tolerance for investment risk i.e. the amount of money you have invested in shares and property the higher your longer-term expected returns will be but will be subject to the possibility of negative returns from time to time.
When we model scenarios for clients contemplating a move back into the public sector their investment risk profile and expected returns from their current accumulation super is usually an important factor.
Every situation is Different – Seek Advice
The financial decision to move back to the public sector involves multiple scenario analysis and there are many variables that require careful consideration and modelling. There is not a one size fits all approach here. Making the wrong decision can easily cost hundreds of thousands of dollars in foregone superannuation and foregone wealth. In some cases I have seen this cost enter the millions for high income earners.
I have over 20 years’ experience providing advice to PSS preserved members on their return to public sector options. My detailed financial plans can put a value on this to help you with your decision making. Our plans cover off on the following comparisons between PSS and private sector super:
- Projected superannuation values at retirement
- Expected terminal net worth upon average life expectancy
- Net income after tax both now and in retirement
- Tax payable now and in retirement
- Age pension and other Centrelink implications where applicable
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