Should I contribute more than the compulsory 5% to ADF Military Superannuation and Benefits Scheme (MSBS)?

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For your compulsory Member Benefit contributions, you are always worse off by contributing more than the compulsory 5%, and there are no exceptions to this. If anyone is currently putting more than 5%/fortnight into their Member Benefit, I would immediately reduce it to 5% asap. Unlike some of the older defined benefit schemes, you get nothing for contributing more and in the long run get penalised through the Maximum Benefit Limit (MBL). If you still want to contribute extra to MSBS you are better off doing it through your Ancillary Benefits (will detail below), starting with salary sacrificing (more efficient using pre-tax rather than post-tax dollars, anyway). The 5% compulsory contributions use your base salary + certain allowances in it's calculation, but is deducted post-tax.

Both Member Benefit and Employer Benefit contribute to your MBL. Ancillary Benefits (AB) do not. However, only the Employer Benefit portion is used to calculate your pension, even though the Member Benefit counts towards the Maximum Benefit Limit.

In other words, to maximise your pension for a given Maximum Benefit Limit, you need to maximise your Employer Benefit figure and minimise the Member Benefit (minimising Member Benefit is somewhat counter-intuitive, but that's just how the system is set up!), hence why everyone should set the Member Benefit contribution to the minimum (5%). The minimum is also the default rate, luckily.

You would only ever do the following if you are certain that you will hit the Maximum Benefit Limit: (staying in a long time). To further optimise / minimise the Member Benefit, you can slow its gain by selecting the slowest growth option, 'cash'. However, in doing this you must consider the risk that you do not stay in long enough to reach the Maximum Benefit Limit. For example, If at any point you selected 'cash', and did not reach the Maximum Benefit Limit, you are now worse off. You'll need to make your own calculations as to whether you think you will hit the Maximum Benefit Limit. Remember circumstances can change, and you may want to get out earlier than you thought you would – so be conservative here.

If you hit the "Lump Sum Maximum Benefit Limit" (has nothing to do with lump sums, nor does it limit you in any way – it's basically a warning), you have the option to stop 5% contributions. If you do this, they will also stop your years of service multiple from increasing (likely worth 28%pa at this point), which is crap. I would keep contributing the minimum rate of 5% even after reaching the Lump Sum Maximum Benefit Limit.

The Lump Sum Maximum Benefit Limit is basically a warning that you will hit your Maximum Benefit Limit in the next 3-6 years, depending on your Final Average Salary. A person with a higher Final Average Salary will hit their Maximum Benefit Limit sooner. If you immediately switch your Member Benefit to the cash option, at the current Maximum Benefit Limit (FY2013-14) you should never hit your Maximum Benefit Limit within three years of reaching the Lump Sum Maximum Benefit Limit. It theoretically could – especially if you receive a pay rise during that period – but otherwise your Final Average Salary would have to be something crazy (300,000+) and you must also have a very high Member Benefit amount. For the vast majority of people, it will probably take about 4-6 years to go from Lump Sum Maximum Benefit to Maximum Benefit Limit. If you plan on staying in longer than this, I would probably switch the Member Benefit to the 'cash' option until you reach the Maximum Benefit Limit. Ask to keep any ancillary benefits (AB) at your preferred growth option, as ancillary benefit does not count towards your Maximum Benefit Limit.

You can switch the Member Benefit back to 'aggressive' or 'balanced' after you reach the Maximum Benefit Limit, because the post- Maximum Benefit Limit calculations use your Member Benefit balance at the time you reach the Maximum Benefit Limit, not your final Member Benefit balance. (https://www.militarysuper.gov.au/publication/resource/?id=218 , page 3). Plus, if you have reached the Maximum Benefit Limit, you will likely be receiving a sizeable pension somewhere in the order of 72-90% of your Final Average Salary, thus you are in a better position to weather the risks of an 'aggressive' super strategy, compared to someone who is 100% reliant on their accumulated super.

In another weird oddity, it is actually a good thing if the market has a huge downturn, but only if it's just before you reach your Maximum Benefit Limit (that is, the market needs to be crap by the time you reach your Maximum Benefit Limit). Your Employer Benefit is now a higher ratio of the Maximum Benefit Limit than it was before (which is good, that means a higher pension!). Switch your Member Benefit to cash to lock in your losses until you reach your Maximum Benefit Limit; then switch it to aggressive thereafter and ride the market recovery.

All in all though MSBS is still a bloody good Super Scheme compared to what others outside of Military have access to, if you have a long period of service that is. Especially after you consider how good the MSBS pensions really are (even if they are a small amount!). The biggest factor is how long the Employer Benefit is left to stagnate to Consumer Price Index (aka 'preserved'). Your length of time served also plays a role but it is a much smaller consideration.

Making some assumptions and broad generalisations here (such as starting pension at age 55, and joining young), but if you retire: - at or after age 55, MSBS is absolutely stellar. Second only to politicians' and magistrate pensions. You would probably be in a position to continue paying down your mortgage / further build up your investment portfolio and even service new loans; all whilst doing nothing. And then when you reach preservation age, take the lump sums out from your Member and Ancillary Benefits and pay off those loans! Or invest more. Or anything else... Yes you will pay some tax on your pension (you pay less tax after turning 60), but it's essentially free money from this point on for the remainder of your years – a guaranteed, passive income stream, and then some more.

45-55: Excellent. 10 Years of Consumer Price Index is really not that bad when you consider the generous pension conversion factors. Your MSBS pension alone could probably give you a modest or even comfortable retirement, depending on your Final Average Salary.

40-45: Good. Probably still much better off than in MSBS than crystallising the Employer Benefit into another fund, if that were to be possible. Depending on Final Average Salary, your pension may not be enough to live off entirely, but it should definitely reduce the rate that you dip into other superannuation amounts.

35-40: Reasonable. If you've been in a while (20+ years), your pension is likely to still be an ok (35% or so) proportion of your Final Average Salary. Probably more than the Age pension by this point. It will look like Consumer Price Index-only-indexation has hit you hard (which it probably has), but don't forget those generous pension conversion rates.

25-35: Suboptimal to equivocal. Under MSBS, although you'd get the security of the pension it may not have had the chance to build up enough and not likely to be contributing to much of your retirement income at all. Possibly would have been better off in an accumulation style scheme, or to have crystallised the Employer Benefit if it were possible (unless you think you might rejoin later).

Under 25: Poor. Likely better off in ADF Super. Go ahead and crystallise the EMPLOYER BENEFIT if it becomes available (unless you re-join later, then you'd still want to be in MSBS)

Note: throughout this entire post, references to "MBL" (Maximum Benefit Limit), actually mean the Pension Maximum Benefit Limit (PMBL), which is the 'true' limit of the two MBLs. (The other MBL being the Lump Sum MBL, which is essentially just a warning you are approaching your PMBL).

For all you long term serving members, its all based on the sum of both your Member Benefit and Employer benefit (Employer Benefit) reaching the yearly revised Maximum Benefit Limit. The ratio between the two, determines whether you have a larger Member Benefit available to you at preservation age and a smaller Employer Benefit or visa versa

Let the Employer Benefit work for you rather than your own money.