ADF MSBS Pension considerations: conversion factors and age of access - Military Superannuation and Benefits Scheme

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Australian Defence Force Military Superannuation and Benefits Scheme (MSBS) members can access their pension from age 55, which is below preservation age (when ordinary folk can access their super, currently 60) and Age pension age. All you need is an 'intent' to retire. Currently, MSBS members must access their pension by age 65 otherwise it will be converted to a lump sum.

This is very favourable for MSBS. As the Age pension age is rising, it is quite possible that the preservation age will rise also (to stop people squandering their super too fast and then just going on the Age pension). MSBS is legislated to allow pensions from age 55. Given the unique nature of military service plus now that the scheme is to be closed, it is unlikely this age will change at all.

The pension conversion factor (PCF) at ages 55, 60 and 65 are 12, 11 and 10 respectively. Interestingly, they actually calculate it based upon your exact age, to the day. https://www.militarysuper.gov.au/publication/resource/?id=214 ; page 2.

The PCF is used to work out the rate of your lifetime annual pension.

Employer Benefit (EB) divided by PCF = lifetime annual pension (before tax)

Therefore, if you started 55, you would need to live 12 years (67yo) in order for the pension to exceed your EB. At 60, it becomes 71; and at 65 by 75 years of age you would have gotten "your money's worth", so to speak. Barring any major health problems, most people could live well past these ages.

What about the age I should retire?

If you decided to retire today with an Employer Benefit of $42,000; and if you were aged exactly:
55, it would be $3,500pa
60, it would be $3,818pa
65, it would be $4,200pa
This is all before tax (gross value)

Now, in comparing retiring at 60 and 65: If you took the pension at 65, you would need to live to about 115 in order to exceed the amount that you would have gained between age 60 and 65 (excluding CPI from calculations here). Plus, there is an opportunity cost for deferring money you could be receiving sooner.
Between 55-60 is more complicated, as you pay marginal tax rates (without any offset) on the vast majority of your pension. However, it still strongly favours taking it early.

Summary of MSBS pensions:
1. The value of your pension is actually worth considerably more than the figure your "Employer Benefit" is quoted at – if you live longer than your PCF.
2. Generally, you are better off taking the pension as early as possible if you are already a preserved (retired) member.
3. If you are still in the ADF and are enjoying it, you may as well stay in until they make you retire. Keep an eye on your Maximum Benefit Limit.
4. The only time you should consider converting part of the pension to a lump sum is if you are below preservation age and really, really need a lot of money now – as it will be absolutely taxed to the hilt. Your Member Benefit and Ancillary benefits only come in lump sums and are accessible from preservation age/age 60, with very good tax treatment. If you need/want a wad of cash, just wait for those lump sums, and plan accordingly in the meantime.
5. I believe MSBS pensions will affect eligibility for an Age pension. However you are guaranteed the MSBS pension regardless of assets or other income.
6. The most optimal usage is therefore to maximise the MSBS pension + alternate sources of income; so you can draw down less on any other super you may have (making it last longer, or at least until Age pension age).
Or, have your MSBS pension high enough that you can just live off it for life

Tax stuff

You pay tax on your MSBS pension at marginal tax rates. Tax is complicated. Especially for MSBS.

This is because you can access MSBS pensions below the preservation age , but once you turn 60 you receive a tax offset of about 10% of your pension. A tax offset directly reduces the amount of tax you would have had to pay, dollar for dollar. (A deduction reduces the income you pay tax on = the benefit is equal to only your marginal tax rate.). $1 of offset is always worth more than $1 of a deduction (unless your you pay $0 in tax). So this offset is actually quite good.

Currently the best tax treatment (for both pensions/lump sums) is only applied once you are 60 or over. I don't know if this will change or not if the general community preservation age increases (currently 60). It would be best to assume that this is linked to community standards.

A full description of tax treatment of lump sums and pensions here:
https://www.militarysuper.gov.au/publication/resource/?id=229
https://www.militarysuper.gov.au/publication/resource/?id=234