Choosing an indexed pension

THE last So Super column examined retirement benefit options for members of the Military Superannuation Benefits Scheme (MSBS).

Those retirement options provide for payment of your member benefit and allow you to choose how you want to receive your employer benefit. You have the option to convert all, or at least half, of your employer benefit into an indexed pension.

This column looks at practical examples of how this conversion is calculated.

First, you need to know the pension conversion factor specified in the scheme rules that applies to you. It is based on your age at retirement. These factors are:

For each year of age under 55 the pension factor increases by 0.2.

Your pension factor is determined by your age at the time of claiming your benefit and takes into account years and days.

For example, if you retired at age 56 years and 135 days your pension conversion factor would be 11.7260.

Let’s assume that your lump sum employer benefit on retirement at age 56 years and 135 days is $396,315.75.

(This is achievable if your final average salary at retirement is $56,215 and you had been a member for exactly 30 years). To convert all of that employer benefit to a pension, the amount of pension would be calculated as follows: $396,315.75 ÷ 11.7260 = $33,798.03 p.a.

You would therefore be entitled to receive a pension of $33,798 (each year for the rest of your life). Even on your death, a reversionary pension may be payable to your eligible spouse. (This type of benefit will be covered in a future column.)

Pensions paid under the MSBS are increased twice a year – January and July – in line with increases in the Consumer Price Index.

Of course you have the option of only converting half of your employer component to pension. In that instance, as well as receiving a lump sum payment of $198,157.87 (over and above your member benefit), you would receive a pension calculated as: $198,157.88 ÷ 11.7260 = $16,899.02 p.a.

Alternatively, on retirement you may have some debts that you wish to pay off, but also want to claim a pension. Let’s assume that you want to receive a lump sum of $100,000 from your employer benefit to satisfy those debts, but wish to convert the remainder of your employer benefit to a pension. In that case your pension would be calculated as: $296,315.75 ÷ 11.7260 = $25,269.98 p.a.

To exemplify the way that the pension factors work for different retirement ages, let’s use the example of a member with identical service and salary history (hence using the same employer benefit of $396,315.75).
However, in this instance you are retiring at age 57 years and 84 days (i.e. a slightly older age than the first example).

In this scenario, your pension conversion factor would become 11.5540 and your pension, in the case of a full conversion, would be calculated as follows: $396,315.75 ÷ 11.5540 = $34,301.17 p.a.

Compare this rate of pension to that of the person that retires aged 56 years and 135 days
(i.e. $33,798.03 p.a.) who has otherwise identical service and earnings.

These simple examples demonstrate that you have a significant degree of flexibility when claiming your employer benefits and tailoring them to your financial situation at the time of your retirement.

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