Defined Benefits Funds vs Accumulation Funds

Despite the big words, it’s easy to understand the meaning of superannuation language like ‘accumulation fund’ and ‘defined benefit superannuation’ when it is spelled out clearly for you.

Here’s a brief overview:

Accumulation funds

Most Australians have their super in an accumulation fund. They are called ‘accumulation’ funds because your money grows or ‘accumulates’ over time. The value of your super depends on:

  • How much money your employer contributes
  • How much extra you contribute
  • How much you receive in bonus contributions
  • How much your fund earns from investing your super
  • The amount of fees charged
  • The investment option you choose

Investment profits are added to your account, and investment losses are taken out. It’s important to understand that in an accumulation fund you bear the risk of your super payout being lower if financial markets drop.

Defined benefits fund

Defined benefit funds are less common than accumulation funds. Most defined benefit funds are corporate or public sector funds, and many are now closed to new members.

The value of your retirement benefit is defined by the fund rules and depends on:

  • How much money your employer contributes
  • How much extra you contribute
  • How long you have worked for your employer
  • Your salary when you retire

For example, after 25 years’ membership, your retirement benefit might be worth:

  • Five times your final salary (as a lump sum), or
  • 75% of your final salary (as a monthly payment), until you die

In a defined benefit fund your employer or the fund generally takes on the investment risk. But be aware that defined benefit funds can be affected by market downturns, and some employers or funds may have difficulty taking on the market risk.

Never leave a defined benefit fund unless you’re very sure that you will be better off. Some of them are very generous, so always get professional advice if you’re considering changing from a defined benefit fund to an accumulation fund. Once you get out, you generally can’t get back in.

If you’re thinking about changing funds, start by working out where you stand now and what you want out of your super fund. Different types of funds have different features and drawbacks. Knowing the type of super fund you’re in will help you make informed decisions about your super savings.

If you’re comparing Superannuation funds, the comparison table below displays some of the products currently available on Canstar’s database for Australians aged 30-39 with a balance of up to $55,000, sorted by Star Rating (highest to lowest), followed by company name (alphabetical). Use Canstar’s superannuation comparison selector to view a wider range of super funds.

Fee, performance and asset allocation information shown in the table above have been determined according to the investment profile in the Canstar Superannuation Star Ratings methodology that matches the age group you selected.

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