R e p o r t t o t h e F i r e B r i g a d e E m p l o y e e s U n i o n

R e po r t t o t h e F i r e B r i ga d e E m p l o ye e s U n i o n NSW PUBLIC SECTOR SUPERANNUATION PROVISIONS Prepared by Ella d e Rooy d e R o...
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R e po r t t o t h e F i r e B r i ga d e E m p l o ye e s U n i o n

NSW PUBLIC SECTOR SUPERANNUATION PROVISIONS

Prepared by

Ella d e Rooy

d e R o oy C o ns ul ti ng P ty L td

December 2001

DISCLAIMER This paper does not purport to reflect all the legislative provisions governing the various public sector superannuation described in it. It is intended as a general description only of the conditions applying to the various schemes and their benefits, including the tax and preservation treatment of such benefits.

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CONTENTS

PAGE

1. EXECUTIVE SUMMARY

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1.1

Introductory remarks

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1.2

Commonwealth rules regarding tax and preservation

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1.3 State Superannuation Scheme 1.3.1 Invalidity pensions 1.3.2 Death benefits

5 5 6

1.4 SASS and SPSSS 1.4.1 Invalidity benefits 1.4.2 Death benefits

6 7 7

1.5 First State Super (FSS) 1.5.1 Invalidity benefits 1.5.2 Death benefits

7 8 8

2. STATE SUPERANNUATION SCHEME (SSS)

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2.1

Background

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2.2

Nature of scheme

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2.3

Overall benefit structure

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2.4 Basis of entitlements and contributions 2.4.1 Unit entitlements 2.4.2 Contributions 2.4.3 Reduced value units and regained units

12 12 13 13

2.5 Invalidity benefits in detail 2.5.1 Pension entitlement

13 13

2.6 Pension payment conditions 2.6.1 Preservation 2.6.2 Tax

14 14 15

2.7 Death benefits in detail 2.7.1 Reversionary Pensions 2.7.2 Death benefits where there is no spouse 2.7.3 Tax and preservation

16 16 17 17

3. STATE PUBLIC SERVICE SUPERANNUATION SCHEME

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4. STATE AUTHORITIES SUPERANNUATION SCHEME (SASS)

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4.1

Nature of scheme

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4.2

Broad benefit structure

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4.3

Contributions and benefit point accrual

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4.4

Insurance arrangements

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4.5 Disability benefits in detail 4.5.1 Members with Additional Benefit Cover (ABC) 4.5.1.1 Total and permanent invalidity benefit 4.5.1.2 Tax and preservation 4.5.1.3 Partial and permanent invalidity benefit 4.5.1.4 Tax and preservation 4.5.2 Members without Additional Benefit Cover (ABC) 4.5.2.1 Invalidity benefits 4.5.2.2 Tax and preservation

20 21 21 21 21 22 22 22 23

4.6

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Death benefits

5. FIRST STATE SUPERANNUATION FUND (FSS)

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5.1

Broad benefit structure

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5.2

Contribution structure

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5.3 Insurance arrangements 5.3.1 Automatic death or invalidity insurance (DORI) 5.3.1.1 DORI Premiums and Cover 5.3.2 Optional Additional Cover

25 25 26 26

5.4 Lump sum disability benefits 5.4.1 With insurance cover 5.4.1.1 Total and permanent invalidity benefit 5.4.1.2 Tax and preservation 5.4.2 Without insurance cover 5.4.3 Income protection benefits

27 27 27 27 27 28

5.5 Lump sum death benefits 5.5.1 No insurance 5.5.2 With insurance 5.5.3 Tax and preservation

28 28 28 28

Appendix 1 Appendix 2

FSS Insurance cover by age Taxation treatment of superannuation lumps sums and pensions 32

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Appendix 3

Comparison of tax and preservation impact of various schemes and current proposals

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1 . EXECUTIVE SUMMARY 1.1

Introductory r e m a r k s

The briefing paper sets out the general benefit and member contribution structure of the closed NSW public sector schemes previously available to firefighters: •

State Super Scheme (SSS) – closed 30/6/85



State Public Service Superannuation Scheme (SPSSS) – 1/7/85 to 31/3/88, all members transferred to SASS on 1/4/89



State Authorities Superannuation Scheme (SASS) 1/4/88 closed12/12/92

and that currently available: •

First State Superannuation Scheme.

The paper also discusses the way in which the preservation and benefit tax rules affect the payment of death and invalidity benefits from each of these schemes. The benefits payable from SSS and SASS are subject to a 15% reduction in respect of the employer financed portion accrued after 1 July 1988, when the Commonwealth introduced the 15% tax on employer contributions. All benefit examples given in the paper are calculated before this reduction is applied. This is because there is no simple rule to reflect the reductions, which depend on a member’s contribution and service history. The paper also does not take into account the effect of Commonwealth Reasonable Benefit Limits or the Superannuation Surcharge. The impact of these will vary between members, depending on earlier benefits received, income from other sources etc. 1.2

Commonwealth rules regarding tax and preservation

Since the introduction of award superannuation, the Commonwealth government has increasingly required superannuation benefits to be preserved in a superannuation fund until retirement after ‘preservation age’ (currently 55, but increasing gradually to age 60), or another condition of release, such as total and permanent incapacity or death. Special dates applied to preservation for public sector schemes, which generally agree to abide by Commonwealth superannuation legislation under a Heads of Government Agreement. Some NSW employer benefits (eg the Basic Benefit) have been subject to preservation from 1990, but member contributions and most other employer financed benefits were not affected until 1999. With effect from 1/7/99, the $ amount of benefits that are not subject to preservation was frozen, and all benefits and contributions accrued from that date must be preserved. For invalidity benefits, the effect of the preservation rules is that in order to have the whole of an invalidity benefit paid out, the member must be able to produce certification from 2 legally qualified medical practitioners that the member is unlikely, REPORT TO FBEU ON NSW PUBLIC SECTOR SUPERANNUATION

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because of the ill-health ever again to engage in gainful employment for which the member is reasonably qualified by education, training or experience. If a member is unable to produce such certification, part of the benefit (whether pension or lump sum) will be subject to preservation. This means they must remain within the superannuation system until a condition of release is satisfied. These include retirement after age 55, total and permanent disability, and death. In terms of tax, similar certification is required for the pension or lump sum benefit to receive the concessional tax treatment available to total and permanent invalidity benefits. The tax treatment of superannuation lump sums and pensions is set out in Appendix 2. 1.3

State Superannuation Scheme

The SSS was originally designed as a contributory pension scheme, but now allows all pensions to be commuted to lump sums from early retirement age. SSS has a complex contribution structure based on entitlements to ‘units’ of pension benefits. Contributions for full unit and benefit entitlement increase with the member’s age as well as salary, and can become prohibitive. Over time contribution rules have been amended so that, provided they contribute until contributions reach 6% of salary, members will at least qualify for the nominal employer financed part of any further pension units to which they become entitled. Effectively every member of SSS has insurance cover, which is built into the benefit structure for both invalidity and death benefits (assuming there are dependents). 1.3.1 Invalidity pensions

The invalidity benefit is an indexed pension payable for life, which can be commuted to a lump sum at early retirement age (55) or normal retirement age (60). The gross maximum invalidity pension for a senior firefighter on $48,000 pa who ceased work in 2001 would be approximately 61% of salary. In addition an award style Basic Benefit of 3% of salary for service since 1/4/88 would apply . The invalidity pension is payable if firefighters are considered unfit for the duties of their position by the State Authorities Superannuation (SAS) Trustee, on medical advice. If the member is able to obtain the total and permanent invalidity certification referred to in section 1.2 above, all of the pension, and the Basic Benefit, can be paid out to the member. Part of the pension will be tax free (reflecting a return of member contributions), the remainder will be taxed as ordinary income, but will attract a 15% tax rebate. Part of the Basic Benefit will also be tax free, with the remainder taxed at 20%. (See Appendix 2) If the member is unable to obtain the required certification, a small (but growing) part of the pension, and all of the Basic Benefit, will be subject to preservation. For the pension this means that the preserved portion must either be paid as a noncommutable pension, or be accumulated for the member is a special account until REPORT TO FBEU ON NSW PUBLIC SECTOR SUPERANNUATION

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such time as the member retires after age 55, or can obtain the necessary certification. In this situation, full marginal tax will apply to the whole of the pension payment (other than the return of member contributions) and any Basic Benefit that can be paid out before age 55 would be taxed at 20%. (See Appendix 2). It is also possible that the member would be affected by the Reasonable Benefit Limits. 1 . 3 . 2 Death benefits

Reversionary pensions are payable on the death of a member or a pensioner to a surviving spouse who satisfies the fund’s definitions for this purpose. Reversionary pensions are paid at the rate of 2/3 of the primary pension, ie the (indexed) pension to which the pensioner was entitled, or the deceased member would have been entitled at the time of death. Reversionary pensions are a separate benefit not affected by any commutation of the primary pension, and can themselves be commuted at age 55 or 60. A lump sum benefit equal to a resignation benefit is paid to the estate where there is no spouse. The scheme also pays fixed pensions to dependent children. There are also complex minimum benefit provisions which mean that the total amount paid in respect of a member must be at least equal to the resignation benefit that would have been payable at the time the member left the fund – ie after allowing for benefits paid to the member, the member’s spouse and any children. Death benefits are not subject to the 15% benefit reduction referred to in section 1.1 above. No preservation applies to death benefits. Reversionary pensioners pay tax at marginal tax rates on the taxable part of the pension, but are entitled to a 15% rebate on that tax. Lumps sums such as the Basic Benefit are tax free if paid to a spouse, child under 18 or other dependent. (See Appendix 2) 1.4

SASS a n d SPSSS

The SASS is a ‘hybrid’ lump sum scheme which has accumulation style member financed benefits and defined benefit style employer financed benefits. Membership of the scheme was optional; public sector employees who did not join were entitled to the Basic Benefit only. Employer financed benefits are related directly to the contribution rate selected by the member and the number of years of contributions. Maximum employer financed benefits per year of membership are 15% of salary, to a maximum of 450% over 30 years of membership. Insurance cover, known as Additional Benefit Cover (ABC), is optional and subject to health conditions. It is financed jointly by the member and the employer.

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1 . 4 . 1 Invalidity benefits

Invalidity Benefits in SASS depend on whether members have ABC and whether they are totally and permanently incapacitated for all reasonable work or not. A total and permanent incapacity benefit including the Additional Benefit consists of the member accumulation, an accrued employer financed benefit of a maximum of 15% of salary per year of service, and a maximum Additional Benefit of 24% of salary for the balance of service to age 58, with a maximum of 30 years of accrued and prospective service counting. A firefighter aged 40 who joined SASS in 1989 and retired with a total and permanent invalidity benefit in 2001 would receive some $300,000 in employer financed and Additional Benefit, as well as the balance in his or her own contribution account. Assuming the required medical certification is provided, no preservation would apply to the benefit (or the associated Basic Benefit), and a very substantial portion would be tax free. (See Appendix 2) A firefighter who retired unfit for duty but is unable to obtain the required certification would not receive the Additional Benefit component, and would have to preserve part of the benefit. Tax at 20% would apply to any part of the benefit that was paid out (other than the return of member contributions). (See Appendix 2) A firefighter who did not have Additional Benefit cover but did satisfy the total and permanent certification would also not receive the Additional Benefit, but would be able to have the whole of the benefit paid out and receive the invalidity tax concessions. Ex members of SPSSS who were transferred to SASS receive a higher employer financed benefit multiple (max 18% pa) and are able to retire from age 55 instead of 58 with full benefits. 1 . 4 . 2 Death benefits

SASS death benefits are effectively the same as the invalidity benefits outlined above, depending on whether the member was covered for Additional Benefits or not. However, the 15% benefit reduction does not apply to death benefits. Death benefits are not subject to preservation and are paid to a surviving spouse or the member’s estate if there is no spouse. No tax is payable if the death benefit is paid to a spouse, or to a dependent through the estate. Otherwise it is taxed as an ordinary lump sum superannuation benefit, except that the low tax threshold does not apply. (See Appendix 2) 1.5

First State S u p e r (FSS)

FSS is an accumulation style superannuation fund and is the only scheme now open to new public sector employees. It was designed to receive compulsory employer contributions which would satisfy the Commonwealth superannuation guarantee

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legislation (currently 8% of salary), but is slightly broader in its coverage than the SG requirements. Member contributions to FSS are completely optional and do not affect the employer financed benefits. Members may also salary sacrifice into this scheme. Benefits on exits other than invalidity or death are the member’s total account balance. FSS benefits automatically reflect the effect of the 15% contribution tax, as this is deducted when employer contributions are paid into the fund. FSS provides for a basic level of automatic death or invalidity cover insurance cover, while members can also elect to be covered for Additional Benefits for those eventualities. Insured benefits are financed from insurance levies on members’ accounts ($5 per month for a unit of insurance); the cover provided varies with age. Members can opt out of insurance altogether. 1 . 5 . 1 Invalidity benefits

Insured invalidity benefits are paid when a member has ceased work for at least 6 months and, as a result of illness or injury, the member is permanently unable to work in any paid employment in which it would otherwise be reasonable to expect the member to work. The amount of the benefit depends on the amount of automatic and additional insurance carried by the member. Currently firefighters up to age 35 would receive the maximum automatic insurance cover benefit of $54,000 (for a premium of $60 pa). If they also hold the maximum Additional Benefit cover available, this would increase to $168,000, (for an annual premium of $240). After age 35, insured amounts decrease with age. For a firefighter age 40, the

comparative figures are $43,200, $73,600 and $134,400 respectively for the same premium amounts. These amounts are in addition to the balance of the member’s account . Firefighters who do not carry any insurance would be entitled to receive the balance of their account only. The preservation and tax treatment of the total FSS benefit paid on invalidity depends on whether the member is able to provide the required medical certification for release of benefit and concessional tax treatment. If this is the case, as it normally would be if the member is entitled to an insured benefit, the whole of the benefit can be paid out to the member. A portion of the benefit would be tax free, while the remainder would be taxed as an ordinary lump sum superannuation benefit. (See Appendix 2) If a member is not able to provide the required medical certification, the whole of the FSS benefit would normally have to be preserved until a condition of release is satisfied. 1 . 5 . 2 Death benefits

Death benefits in FSS are effectively the same as the invalidity benefits described above, and depend on the amount of insurance cover the member has. Death benefits are not subject to preservation and are tax free if paid to a spouse, dependant child (under 18) or another person who was dependant of the deceased REPORT TO FBEU ON NSW PUBLIC SECTOR SUPERANNUATION

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member. Otherwise tax at a maximum rate of 15% would apply to the taxable part of the benefit (ie the tax free threshold does not apply). (See Appendix 2)

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2 . S T A T E SUPERANNUATION SCHEME ( S S S ) 2.1

Background

The State Superannuation Scheme (or Fund as it was initially known) was established by the Superannuation Act 1916 and covered permanent employees in NSW government Departments and certain other NSW government bodies, including the NSW Fire Brigade. The scheme was closed on 30 June 1985, with eligible new employees from that date joining the State Public Sector Employees Superannuation Scheme. Members of the SSS became entitled to a benefit reflecting the 1988 3% superannuation award applicable from 1 April 1988. This is known as the Basic Benefit and is provided under the State Authorities Non-contributory Superannuation Act 1987. The Basic Benefit provides 3% of final (average) salary for each year of service from that date. All existing members initially remained in the SSS and continued to be covered by its benefits. In 2000, members of the fund were provided with the opportunity to elect to transfer their accrued entitlement in the SSS and the Basic Benefit scheme to the First State Superannuation Fund (FSS), and receive benefits under that fund for all future service. (An opportunity to reverse such elections was provided in 2000 following the introduction of same sex spouse pensions in SSS). 2.2

Nature o f scheme

The SSS was originally designed as a defined benefit pension fund; the opportunity to commute some or all of a pension entitlement to a lump sum at early or normal retirement age was added much later. In a defined benefit fund, members’ benefits are not based on the actual contributions made and the earnings of the fund. Instead, they are based on a formula using final salary. In the SSS, both the benefit formula and the contribution structure for members are complex, largely because it is based on unit entitlements (see below) rather than the straight ‘salary and service’’ related benefit structure and percentage contribution rates that are generally found in defined benefit funds.

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2.3

Overall benefit structure

Note: 1

All benefits payed to members of the SSS are subject to a minimum required under Commonwealth legislation reflecting compulsory employer contributions from 1992 under the Commonwealth Superannuation Guarantee Act. While SSS benefits generally exceed this minimum, any additional payment is made as a lump sum with the Basic Benefit where this occurs.

2

All SSS and Basic Benefits (other than the death benefits) are subject to a benefit reduction of 15% of the employer financed benefit that has accrued after 1/7/1988, as a result of the introduction of the 15% tax on employer contributions from that time. The effect of the reduction depends on a member’s contribution history, as well as their years of membership before and after 1 July 1988. For the Basic Benefit, the benefit reduction effectively brings the annual benefit accrual back to 2.55% of salary from 1/7/88. The SSS benefit examples in this paper do not take account of this benefit reduction. This reduction is offset by the 15% reduction in tax on lump sums, and the 15% tax rebate on superannuation pensions.

The SSS pays the following benefits: •

Resignation benefits, payable when a member resigns, based on member contributions and interest (at a prescribed rate to 1972, and fund earning rate thereafter), with an additional (employer financed) benefit of 2.5% of that amount paid for each year of service. An optional deferred benefit is available instead of the ‘cash’ resignation benefit; the deferred benefit provides a member with rights to a reduced pension at normal or early retirement age, on death or on total and permanent invalidity.



Retirement Benefit, payable at age 60 as an indexed pension which can be converted (‘commuted‘) to a lump sum in whole or part. The pension is based on the number of full and reduced value units held and/or purchased in retirement (see section 2.4 below). Women who elected to contribute at the higher rate required for age 55 retirement can retire at that age with full pension.



Early Voluntary Retirement benefit, payable from age 55 for members who have a normal retirement date of 60, as a reduced indexed pension which can be commuted in whole or in part.



Invalidity Retirement Pension payable when a member is physically or mentally incapable of performing his or her duties, as determined by the Trustee Board, as an indexed pension at the rate of a normal retirement pension based on units held at the time of retirement. Ongoing payment of the pension is subject to review of ongoing disability and the pension cannot be commuted to a lump sum until age 55.

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Retrenchment benefit payable on bona fide retrenchment as defined as a lump sum or pension equivalent to an early voluntary retirement benefit discounted to the member’s age, or at 55 or 60 as a normal or early voluntary retirement benefit provided the member has at least 10 years’ service.



Benefits on the death of a member are payable as







A lump sum to the member’s estate equal to the resignation benefit if there are no surviving spouse or children;



A lump sum as above, or a refund of contributions plus children’s pensions if there is no spouse but there are children under 18 (or 25 if full time students);



A pension to the surviving spouse (including de facto or same sex spouses) equal to 2/3 of either the member’s invalidity or normal retirement benefit entitlement depending on member’s age at time of death, which can be commuted; plus children’s pensions to any children under 18 (or 25 if full time students);

Benefits on the death of a pensioner are payable as reversionary pensions to a surviving spouse (as defined above), regardless of any commutation by the pensioner, equal to 2/3 of the indexed pension being at the time of death, or that would have been paid if the pensioner had not commuted, provided −

In the case of an invalid pensioner, the spouse was a spouse either at the time the invalid pension entitlement arose, or was a spouse before the pensioner’s normal retirement age (60 or 55 for some women) and for more than 3 years before the death of the pensioner



In the case of other pensioners, the spouse was a spouse at the time the pension entitlement arose.

Lump sum benefits can be paid instead of pensions for all benefits other than child pensions; in the case of invalidity pensions, a lump sum option is not available until age 55.

2.4

Basis o f entitlements and contributions

The basic element in the scheme is a unit of pension worth $5.50 per fortnight when it commences to be paid. Both employers and members normally ‘contribute’ to the cost of such units, although over time various concessions have been made in this area. All benefits other than the cash resignation benefit are related to the number of pension units to which a member is entitled to contribute, and the number to which he/she does contribute. 2 . 4 . 1 Unit entitlements

Unit entitlements depend on salary, but are not fully proportionate. As at June 2001, members are entitled to contribute 21 units, plus one unit for every $260 of salary (as defined for superannuation purposes). The initial allocation of 21 units is indexed each quarter for inflation. The effect of this unit entitlement formula is that maximum pension REPORT TO FBEU ON NSW PUBLIC SECTOR SUPERANNUATION

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benefits are not a fixed percentage of salary, but reduce as a percentage of salary at retirement as salary increases. A person with a salary of $30,000 at 30/6/01 would have a unit entitlement of approximately 136, and a maximum pension entitlement of $750 per fortnight or 65% of current fortnightly salary (before benefit reduction). A person on $50,000 at 30/6/01 would have unit entitlement of 215 and a maximum pension entitlement of $1,173 or 61% of current fortnightly salary (before benefit reduction). 2 . 4 . 2 Contributions

There is no single contribution rate in the SSS. As indicated above, each pension unit has a fixed value at normal retirement age. Member contributions are designed so that members pay for the whole of the member-financed part of each unit over the expected contribution period for that unit. This means that the fortnightly contributions that members are required to make for each unit depend on when they first commence paying for that unit – the closer to retirement, the higher the fortnightly contribution rate for new units. Members are able to abandon new units for which they do not wish to contribute, once their contributions reach 6%. It is possible to regain abandoned units (ie to start contributing for them) at any time (including at retirement –see section 2.4.3 below). 2.4.3 Reduced value units and regained units

There are two ways in which members are able to get some pension value for their abandoned units: •

Provided members contribute at least 6% of salary, all abandoned units will become reduced value units which pay the nominal employer financed part of the pension benefit ($3.30 per fortnight for invalidity or normal retirement).



At normal retirement age only, it is possible to regain abandoned units and turn them into full value pension units, by paying the full member contribution value of those units, (eg by commuting some pension entitlement and using the lump sum to regain abandoned units). This will ensure that the full pension value of $5.50 applies, and that any spouse benefit is 2/3 of the full pension also.

2.5

Invalidity benefits i n detail

2 . 5 . 1 Pension entitlement

The invalidity pension is paid when a member is retired from employment because of invalidity or physical or mental incapacity to perform his/her duties, as determined by the Trustee Board (SAS Trustee Corporation), based on relevant factors including medical advice provided by the Board’s nominated medical adviser.

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The level of pension depends on the member’s unit entitlement at the time of ceasing employment, the number of units for which the member is contributing and the number of reduced value units. As indicated above, the pension entitlement is $5.50 per fortnight per full pension unit, and $3.30 per fortnight per reduced value unit. Any abandoned (or reduced value) units for which the member has voluntarily started contributing less than 2_ years before invalidity retirement will not count as full pension units – they will be paid as reduced value units and the member’s contributions to these units will be refunded. By way of example, a senior firefighter on a salary for superannuation purposes of $48,000 would be entitled to contribute to a maximum of 205 units. Assuming the firefighter contributes for all units, the invalidity pension would be approx. $1,130 per fortnight, or 61.2% of pre-retirement income. In addition to the pension, an employer financed Basic Benefit of 3% of salary for each year of service since 1/4/88 would apply. 2.6

Pension payment conditions

The invalidity pension is indexed annually to the consumer price index. The ongoing payment of the pension is subject to review of the pensioner’s fitness for duty until age 55; if a pensioner is deemed fit for duty, the previous employer, or the Trustee Board, must arrange suitable employment before the pension can cease. Because the pension is reviewable, it cannot be commuted to a lump sum before early retirement age. An option to commute it to a lump sum is available at 55 and at age 60. The commutation rate (ie the lump sum value of each $ of fortnightly pension) depends on the person’s age at commutation date. The maximum lump sum value is $285 per $1 of fortnightly pension at age 55. 2.6.1 Preservation

The payment of both pension and lump sum benefits is affected by Commonwealth rules regarding the preservation of benefits for retirement This means that a benefit that is subject to preservation can only be paid out to the member if that member satisfies a condition of release. The relevant condition of release for the payment of an invalidity pension, or the associated Basic Benefit, is permanent incapacity. It requires the member to satisfy the trustee that he/she is unlikely, because of the ill-health ever again to engage in gainful employment for which the member is reasonably qualified by education, training or experience. To do so the member must have certificates from two qualified medical practitioners to that effect. If a member is entitled to an invalidity pension because he/she is unfit to be a firefighter, but cannot obtain the necessary certification for permanent incapacity, some of the pension benefit, and most of the Basic Benefit, will have to be preserved. The amount if pension that has to be preserved reflects the difference between the invalidity pension that would have been payable to the member had they retired on

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1/7/1999, and the invalidity pension now payable. The member then has the following choices: 1. The preserved part of the pension can be paid out as a non-commutable pension, ie one that cannot be exchanged for a lump sum at any time (the Basic Benefit would remain preserved, see below). The remaining part of the pension would retain its commutation rights at age 55 or 60) 2. The preserved part of the invalidity pension (and most of the Basic Benefit) will be preserved until permanent retirement after preservation age (between 55 and 60). It will be paid into an account for the pensioner, which attracts interest and management charges. The preserved portion of the pension is subject to normal indexation. When the member satisfies a condition of release (eg permanent retirement after preservation age) the account can be paid out, together with the Basic Benefit, and the full (indexed) pension resumes payment. It can be commuted at age 55 or 60 as before. The part of the pension that has to be preserved, while small at this stage, will become increasingly significant as more of the pension benefit is accrued after 1/7/99. 2.6.2 Tax

Invalidity pensions are taxed as ordinary income, subject to the following concessions: •

The part of the pension that represents a return of the member’s own (after tax) contributions is not subject to tax. (See Appendix 2)



The pension will be subject to a tax rebate of 15% provided the member can satisfy the terms of the Income Tax Assessment Act, “where two legally qualified medical practitioners have certified that the disability is likely to result in the taxpayer being unable ever to be employed again in a capacity for which the taxpayer is reasonably qualified because of education, training or experience”.

The actual tax and preservation outcome therefore depends on the member’s personal contributions, and whether the member is classified as permanently incapacitated.



A firefighter who is unlikely to be able to employed again in a position for which he is reasonably qualified by education, training and experience, as certified by two medical practitioners, will have the whole invalidity pension paid as well as the Basic Benefit. He will qualify for a 15% rebate on the taxable part of the pension, and part of the Basic Benefit will be tax exempt as an invalidity related payment.



A firefighter who is unfit for firefighter duties but considered fit for other duties for which he is reasonably qualified by education, training and experience will have some of the pension preserved, will pay tax at full marginal tax rates on the taxable part of the pension that is paid. (ie no rebate is available)

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If that firefighter chooses to receive a non-commutable pension for the preserved part, all of the pension can be paid out, but he will not qualify for the 15% rebate until he is 55. Most of the Basic Benefit will have to be preserved also; any that can be paid out will attract tax at 20%. 2.7

Death benefits in detail

Note that death benefit are subject to a complex minimum benefit calculation to ensure that the total of all benefits paid in respect of the member (ie including lump sums and pensions paid to the member, the member’s spouse or spouses and any children’s pensions) is not less than the resignation benefit that would have been payable at the time the member retired or died. 2.7.1 Reversionary Pensions

Benefits payable on the death of a contributor who leaves dependents are in the form of •

A reversionary pension to the surviving spouse (legal or defacto) at the rate of 2/3 of the member’s retirement pension (if member dies after normal retirement age) or invalidity pension entitlement (if under normal retirement age).



child pensions where applicable for any children to age 18 (to 25 if studying full time) at the rate of $86.12 per fortnight for half orphans, or $204.54 per fortnight for full orphans. (October 2001 rates – indexed annually)

Note that the 15% benefit reduction following the introduction of the contribution tax in 1988 does not apply to death benefits. Benefits on the death of a pensioner who leaves dependents are in the form of •

a reversionary pension to the surviving spouse (legal or defacto) at 2/3 the rate of the pensioner’s full pension entitlement at the date of death (including any pension that was commuted by the pensioner, together with cost of living increases on the commuted pension).



child pensions as outlined above.

In order to qualify for a spouse pension, the surviving spouse must have been •

a spouse of the pensioner at the time the pension commenced payment, and remained so until the pensioner’s death, or



in the case of an invalidity pensioner, either qualify as above, or have been a spouse before the pensioner’s normal retirement age and for more than 3 years before the death of the pensioner.

Reversionary pensioners aged 55 or over may elect to commute all or part of their pension to a lump sum, providing the election is made within 6 months of the pension starting or of reaching age 55. If a commutation election is not made at this time, a further right to commute the pension arises at age 60. Child pensions cannot be commuted. REPORT TO FBEU ON NSW PUBLIC SECTOR SUPERANNUATION

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2 . 7 . 2 Death benefits where there i s n o spouse

If a member dies without leaving any dependants, the benefit payable to the personal representatives is the member’s withdrawal benefit. If the member dies leaving dependent children only, the benefit is −

either the withdrawal benefit



or a refund of contributions plus a child pension for each eligible child,

as determined by the Trustee Board to be in the best interest of the child(ren) concerned. 2.7.3

T a x a n d preservation

Reversionary pensions are taxed as normal income, but are subject to a 15% rebate on the taxable portion of the pension. (See Appendix 2) Lump sum benefits are tax free if paid to a spouse, a child under 18, or other dependent person, otherwise they attract tax at 15% on the full taxable component (However, lump sums paid in commutation of a pension are not tax free –they are taxed as Eligible Termination Payments - see Appendix 2). Death benefits are not subject to preservation and must be paid out, ie they cannot be rolled over.

3 . S T A T E P U B L I C SERVICE SUPERANNUATION SCHEME After the closure of the SSS from 1/7/1985, new firefighters would have been eligible to join the SPSSS. This was a ‘hybrid’ scheme offering: •

an employer financed, defined benefit lump sum, of 3% of Final Average Salary (FAS) for every 1% of member contributions per year of membership, to a maximum of 540% of FAS after 30 years,



an accumulation account for member contributions which attracted interest based in the fund’s investment earning rate,



a choice of member contribution rates, with each 1% of salary contributed per year attracting 1 benefit point for employer benefits, and



optional insurance cover for additional benefits on death or total and permanent invalidity.

The SPSSS optional insurance was subject to a satisfactory medical history. An insurance levy based on age was deducted from the member’s account to finance the member’s part of the insured benefit. The insured benefit reflected the total benefit a member would have accumulated in the prospective years of service from date of invalidity retirement to early retirement date (age 55). SPSSS was closed to new members from1/4/1988 and was replaced by the SASS, which was similar in structure, although it offers a lower benefit multiple. REPORT TO FBEU ON NSW PUBLIC SECTOR SUPERANNUATION

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Members of SPSSS were transferred to SASS from 1 April 1989, but retained the higher benefit multiple of 3% and the lower early retirement date of 55.

4 . S T A T E AUTHORITIES SUPERANNUATION SCHEME ( S A S S ) 4.1

Nature o f scheme

SASS was established by the State Authorities Superannuation Act 1987 and replaced SPSSS from 1/4/1988. Membership of SASS was optional, and available to all new public sector employees as well as those who had not joined SPSSS previously. SASS closed to new members on 12 December 1992. Like SPSSS, SASS is a hybrid scheme with: •

defined benefit style employer financed lump sum benefits,



accumulation style personal accounts for member contributions which attract interest based on the fund investment earning rate,



an award style Basic Benefit of 3% of final (average) salary per year of service.



a choice of member contribution rates, with each 1% of salary contributed per year attracting 1 benefit point for employer benefits, and



optional insurance cover for Additional Benefits on death or total and permanent invalidity.

4.2

Broad benefit structure

Note: 1

All benefits payed to members of SASS are subject to a minimum required under Commonwealth legislation reflecting member contributions and compulsory employer contributions from 1992 under the Superannuation Guarantee Act. While SASS benefits generally exceed this minimum (except where members have consistently made low contributions), any additional payment is made with the Basic Benefit where this occurs.

2

Benefits paid from SASS are subject to a reduction of the employer financed defined benefit as a result of the introduction of 15% contribution tax in 1988. This reduction applies to the proportion of the benefit accrued after 1/7/1988 and will therefore vary with the length of overall membership. All SASS benefit examples are shown before the benefit reduction.

3

The Basic Benefit of 3% of final (average) salary also applies for each type of exit.

SASS pays lump sum benefits for all types of exit from the fund, as follows:

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Resignation benefits (also payable on discharge or dismissal before age 58) depend on the length of contributory membership with SASS or a predecessor scheme: −

members with less than 10 years contributory membership receive the balance in their personal accounts



members with more than 10 years contributory service receive the balance of their personal account plus 2.5% of that balance for each year of contributory service (based on a maximum pa contribution rate of 6%).

An optional deferred benefit is available instead of the above ‘cash’ resignation benefit, based on the retirement benefit that would have been paid at 58, discounted for the number of years before retirement. This benefit is retained in the fund and earns interest based on the fund earning rate till paid out at age 58, or earlier death or total invalidity. •



Retirement benefits are available on retirement from age 58 (55 for ex SPSSS members) and consist of −

the balance of the member’s personal account



an employer financed benefit of 2.5% (3% for ex-SPSSS members) of final average salary for each accrued benefit point (see below).

Invalidity Benefits (before age 58 or 55 for ex-SPSSS members) depend on the extent of invalidity and whether or not the member is insured for Additional Benefits. −

A partial and permanent invalidity benefit is available if the member retires from employment and the fund is satisfied that the member is permanently unable to perform the duties of his/her position because of mental or physical incapacity. The benefit is a lump sum made up of the balance of the member’s personal account, and an employer financed benefit of 2.5% of final salary for each accrued benefit point .



A total and permanent invalidity benefit is available if a member who is covered for Additional Benefits retires from employment and the fund is satisfied that the member is permanently unable to engage in any paid employment in which, in the opinion of the fund, it is reasonable to expect the member to engage. It consists of the Partial and Permanent Invalidity Benefit plus 4% of final salary for each prospective benefit point to age 58.



Death benefits are payable to the legal or de facto spouse of a member, or the deceased’s estate if there is no surviving spouse. The lump sum benefit depends on whether the member was covered for additional benefits and the age of the member at death. −

If death occurs before age 58, the benefit is either the partial and permanent invalidity benefit if the member was not covered for Additional Benefits, or the REPORT TO FBEU ON NSW PUBLIC SECTOR SUPERANNUATION

19

total and permanent invalidity benefit if the member was covered for Additional Benefits. − •

If death occurs after age 58, the benefit is the same as the normal retirement benefit.

Retrenchment benefit applies if the employer certifies the member is retrenched before age 58 and no other benefit is payable. It is the same as the retirement benefit.

4.3

Contributions and benefit point accrual

Members of SASS are able to nominate the rate at which they wish to contribute each year, within the range of 1% to 9% of salary. These contributions go into their personal accumulation account, which earns interest based on the fund’s investment earnings, and from which any member insurance levies are deducted if the member has Additional Benefit cover. Administration fees are also deducted from this account The balance of this account is the member financed benefit.. For each 1% of salary contributed, members earn or accrue 1 benefit point, which provides an employer financed benefit of 2.5% of salary (3% for ex-SPSSS members) . Although members can contribute up to 9% of salary each year, the maximum number of points members can earn is 6 times the number of years of their SASS membership, or 180 (based on 30 years membership) whichever is the lesser. This provides a potential maximum employer financed benefit of 180X2.5%=450% or 4.5 times (final average) salary (or 5.4 times for ex-SPSSS members). 4.4

Insurance arrangements

Life and disability Insurance in SASS, known as Additional Benefit Cover (ABC) is optional, not automatic. Applications for ABC can be made at any time; they require completion of a health questionnaire and may involve a medical examination if eligibility for cover cannot be assessed on the health information provided. Members who are approved for ABC pay a small levy which depends on age and the size of the insured benefit. It is determined on the recommendation of the fund’s Actuary, and paid into a special fund which finances 25% of the cost of ABC benefits paid. The employer pays the remaining 75% of the cost to the fund. 4.5

Disability b e n e f i t s i n detail

As outlined in 4.3 above, the benefits payable as the result of the disablement or death of a member depends on whether or not the member had Additional Benefits Cover (ABC). In this section the tax and preservation implications of each situation are also covered.

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4 . 5 . 1 Members w i t h Additional Benefit C o v e r (ABC)

The benefit, tax and preservation outcome will depend on or not the member satisfies the total and permanent invalidity definitions of the fund, and for tax and preservation purposes. 4.5.1.1 Total and permanent invalidity benefit The fund’s definition of total and permanent invalidity, requires the Board to be satisfied that the member is permanently unable to engage in any paid employment in which, in the opinion of the Board, it would be reasonable to expect the member to engage. A member with ABC who does satisfy the Total and Permanent Invalidity definition is entitled to a lump sum consisting of •

the member’s own accumulation account



the employer financed benefit of 2.5% of final salary (or final average if higher) for each accrued benefit point (to a maximum of 6 per year)



the Additional Benefit of 4% of final salary per prospective benefit point, which are the benefit points the member could have been expected to accrue between the date of their invalidity retirement and the early retirement age (to a maximum of 180 points). Their calculation is based on the member’s average rate of benefit point accrual during membership.

4.5.1.2 Tax and preservation Generally a member who qualifies for an Additional Benefit under the fund rules would also be able to satisfy the requirements of the tax and preservation legislation. These provide that an invalidity benefit can only be paid out to persons who can provide certification by two qualified medical practitioners that they are unlikely to ever be employed in a capacity for which the are reasonably qualified by education, training or experience. In this case: •

no part of the SASS or Basic Benefit would have to be preserved;



part of the benefit would be tax free as a post 1994 invalidity payment. The tax free component is determined by reference to prospective service (from invalidity retirement to normal retirement date) as a percentage of combined actual and prospective service. (See Appendix 2); and



the remainder of the lump sum benefit would be taxed according to tax rules applying to different components of such lump sum benefit, as set out in Appendix 2.

4.5.1.3 Partial and permanent invalidity benefit A member who in the opinion of the Board •

is retired because of mental or physical incapacity, and



is permanently unable, because of physical and mental incapacity, to perform the duties that were required to be performed before suffering the incapacity

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but who cannot satisfy the total and permanent invalidity in section 4.5.1.1.above, would normally be entitled to a partial and permanent invalidity benefit. This benefit consists of •

the balance of the member’s own accumulation account, plus



an employer financed benefit of 2.5% of final salary (or final average salary if higher) for each accrued benefit point, to a maximum of 6 per year of membership. (3% of salary per benefit point for an ex-PSSSS member).

4.5.1.4 Tax and preservation It is unlikely that a member who cannot satisfy the SASS definition for total and permanent invalidity would be able to satisfy the tax and preservation definitions in section 4.5.1.2 above. As a result, they would be required to preserve any part of the benefit that is subject to preservation either in SASS, or roll it into another fund, until permanent retirement after age 55, or earlier total and permanent incapacity or death. This would apply to both the SASS and the Basic Benefit. The part of each benefit that would have to be preserved is determined under Commonwealth legislation as the total benefit less the maximum amount that could have been paid out in cash if the member had left the fund on 1 July 1999. Broadly speaking the maximum amount that could be paid out in cash from SASS on 1/7/99 was the retrenchment benefit, based on a member’s personal accumulation account and benefit points accrued as at that date. The tax free post 1994 invalidity component would not apply in this case. (See Appendix 2). 4 . 5 . 2 Members without Additional Benefit C o v e r (ABC)

4.5.2.1 Invalidity benefits Where the Board accepts that a member who does not have ABC has retired from work before age 58, directly or indirectly as a result of a mental or physical incapacity, the same benefit applies regardless of whether the member is •

partially and permanently disabled, ie, or



totally and permanently disabled, ie permanently unable to engage in any paid employment in which, in the opinion of the Trustee Board, it would be reasonable to expect the contributor to engage.

The benefit payable is the permanent and partial invalidity benefit as described in section 4.5.1.3 above. On invalidity retirement after age 58, the normal retirement benefit is payable (ie the employer financed benefit is based on final average, rather than final, salary).

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4.5.2.2 Tax and preservation Tax and preservation treatment of the benefit would depend on whether the member can provide the required certification set out in section 4.5.1.2 above. If the member can provide the necessary definition, the benefit would be treated as an invalidity payment for tax and preservation purposes, as set out in 4.5.1.2. If the member cannot provide the necessary certification, they would be subject to the preservation and tax rules set out in 4.5.1.4 above. A firefighter aged 40 who joined SASS on 1 July 1989 who made the maximum contributions throughout service and had Additional Benefit Cover and retired totally and permanently incapacitated on 30 June 2001 would receive (before benefit reduction) •

the balance of his/her personal contributions account, with interest and less the ABC levy and administration charges;



past service employer financed benefits of 12x6x2.5% of Final Salary, or 1.8 x $48,000 = $86,400; and



an Additional Benefit of 18x6x4% of Final Salary, or 4.32 x $48,000 = $207,360.



the Basic Benefit of 12x3%xFS = $17,280

The whole of the benefit would be able to be paid out (ie no preservation). A substantial portion of the overall benefit will be tax free (return of member contributions plus the post 94 invalidity component –approx.$218,000). A firefighter aged 40 who joined SASS on 1 July 1989 who made the maximum contributions throughout service, but did not have Additional Benefit Cover, and retired medically unfit on 30 June 2001 without certification of total and permanent incapacity, would be entitled (before benefit reduction) to: •

the balance of his/her personal contributions account, with interest and less the ABC levy and administration charges;



past service employer financed benefits of 12x6x2.5% of Final Salary, or 1.8 x $48,000 = $86,400; and



the Basic Benefit of 12x3%xFS = $17,280

A small part of the SASS benefit, and most of the Basic Benefit, would have to be preserved. The benefit that could be paid out would attract tax at 20% (plus medicare) on all of the employer financed benefits and the interest on the member’s account. The return of member contributions only would be tax free. 4.6

Death benefits

The death benefit payable to the member’s spouse or estate depends on the age of the member and whether or not Additional Benefit Cover (ABC) was in place: •

If the member dies after age 58, the normal retirement benefit applies;

REPORT TO FBEU ON NSW PUBLIC SECTOR SUPERANNUATION

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If the member dies before age 58 and had ABC, the benefit payable would be the total and permanent invalidity benefit set out in section 4.5.1.1 above;



If the member dies before age 58 and did not have ABC, the benefit payable would be the partial and permanent invalidity benefit set out in section 4.5.1.3 above.

A SASS lump sum death benefit is •

not subject to the 15% benefit reduction based on the 1988 contribution tax



not subject to preservation



tax free if paid dependants, otherwise taxed at a maximum 15% on the taxable component of the benefit (See Appendix 2)

Lump sum death benefits must be paid out to the beneficiaries, ie they cannot be rolled over.

5 . F I R S T S T A T E SUPERANNUATION FUND ( F S S ) First State Super commenced on 12 December 1992, replacing both SASS and the Basic Benefit Scheme. FSS is open to all NSW public sector employees; however, with the employer’s agreement, such employees can have their superannuation paid to another complying superannuation fund. FSS is an accumulation style fund designed in the first instance to provide for compulsory employer contributions in line with the Commonwealth Superannuation guarantee legislation. It has the following features: •

individual member accounts within the fund to which all contributions made by or for them are credited, and against which fees and insurance costs are levied.



a range of investment options, with an age-based default investment strategy.



a basic level of automatic insurance cover unless the member opts out



optional additional benefit insurance cover for death and disability benefits and income protection.

The FSS fund is also available to members of SSS, SASS or the Police Superannuation Scheme to make salary sacrifice contributions, for optional ‘top-up’ member contributions, and for contributions by members on behalf of a spouse. Topup and spouse members do not have access to employer financed benefits in FSS, nor can they have insurance in FSS. These types of membership will not be covered in this briefing paper. 5.1

Broad benefit structure

The normal benefit available for all types of exits is a lump sum equal to the balance of the member’s account at the date of exit from the fund. Where members are covered by insurance for death or invalidity benefits as part of the automatic cover (DORI) or the Additional Benefit cover, additional insured lump REPORT TO FBEU ON NSW PUBLIC SECTOR SUPERANNUATION

24

sum benefits may be payable in addition to the member’s account balance on death or retirement from work because of total and permanent invalidity. Income protection benefits may be payable to members who have taken out this component of Additional Benefits for any periods This benefit is in the form of a monthly income stream for a maximum of 2 years. 5.2

Contribution structure

Employer contributions to FSS are made in accordance with the rules of the fund, at the rate set by the Superannuation Guarantee (SG) legislation (currently 8%, moving to 9% from 1/7/2002). These contributions are made for all members, regardless of age or level of earnings – ie none of the SG exemptions apply to compulsory employer contributions to FSS. Employer contributions are subject to the 15% contribution tax. I don’t think this is true any more: sure that those who have reached their RBL or those on very high salaries can now opt out to that extent. Member contributions are optional, and do not affect employer financed benefits. Members are generally able to contribute on an after tax basis (ie from after tax income) or before tax through salary sacrifice. Salary sacrifice contributions are treated as employer contributions in terms of contribution and benefit taxes. 5.3

Insurance arrangements

Insurance in FSS is provided through an external insurer, and is fully paid for by members, unlike in SSS and SASS where the employer contributes a substantial portion of any insurance style benefits. Two different types of insurance arrangements are available within FSS: •

Automatic Death or Invalidity insurance known as DORI



Optional Additional Benefit Cover for Death or Invalidity, and/or for Income Protection, only for those members who have DORI cover.

5 . 3 . 1 Automatic death o r invalidity insurance (DORI)

Members automatically qualify for a basic level of DORI cover once their account balance reaches $1,000, without having to provide any health information. Members can elect not to have DORI cover at all, or they can opt out at any time. Members can also elect to be covered earlier, in which case they will need to complete a health questionnaire and require specific acceptance by the insurer. The same procedure applies if members reapply for DORI cover after earlier opting out. DORI cover provides automatic Death cover for all relevant members, and invalidity cover for those working at least 10 hours a week. Cover continues until age 65 (or earlier invalidity retirement or death) as long as a member continues to be employed by a FSS employer who pays SG contributions for the member to FSS, and the member has a sufficient account balance to pay insurance premiums. Special arrangements apply to casual employees who are normally only covered in those months in which their employer makes an SG contribution. Such employees are REPORT TO FBEU ON NSW PUBLIC SECTOR SUPERANNUATION 25

able to apply for continuity of cover for 6 months after the last month in which they were employed, subject to premiums being deducted during this period. 5.3.1.1 DORI Premiums and Cover The basic premium charged to members for DORI cover is $5 per month ($60 per year) per member (2000/1 rate). Premiums are subject to annual review. The level of basic insurance cover provided by the $5 premium depends on two factors •

age (it decreases as age increases), and



occupational classifications, as characterised by employer groupings (Fire fighters fall within the emergency service grouping).

A list of the level of cover applicable to firefighters at different ages is attached as appendix 1. By way of example, up to age 34, the basic level of cover is $54,000. By age 37, the cover is $50,625, while by age 40, it is $43,200. From then on it decreases quite rapidly, to $17,550 at age 45 and $8,775 at age 50. 5 . 3 . 2 Optional Additional Cover

Optional Additional Cover can be applied for by any member who is already covered for DORI, with acceptance by the insurer subject to evidence of good health. The options available are: •

Up to 3 units of additional death and disability cover, at a cost of $5 per unit per month. The cover per unit depends on age and occupation as before, but is lower across all ages. For firefighters it starts at $38,000 to age 35, dropping to $30,400 by age 40 and $6,175 by age 50 (see appendix 1 for details).



Cover up to a nominated for $ amount, available only to members with income over $80,000. This cover has a limit of 7 times salary. Premiums vary by age only.



Income protection insurance of either 50% or 75% of salary as nominated by the member from time to time. Initial acceptance by the insurer, and increases of nominated salary, may be subject to evidence of good health. The benefit is payable for a maximum of two years. The premiums for income insurance depends on age and occupation (employer grouping). Annual premium examples for the emergency services grouping which includes firefighters are $2.51 per $1000 of annual benefit at age 20, $2.32 per $1000 at age 30, $3.80 at age 40, $9.41 at age 50 rising to $32.28 by age 60 (see appendix 1 for full details).

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5.4

5.4.1

L u m p s u m disability benefits

With insurance cover

5.4.1.1 Total and permanent invalidity benefit For a member to qualify for payment of a total and permanent invalidity insurance benefit, the FTC Board and the insurer must be satisfied that, as a result of illness or injury, the member is permanently unable to work in any paid employment in which it would otherwise be reasonable to expect you to work. The insurer generally requires the member to have been absent from work for 6 months as a result of illness, accident or injury, before considering a claim for permanent invalidity benefits. As indicated, the amount of the benefit will depend on the member’s age, occupation and the number of additional benefit units, if any. By way of example



a firefighter up to 35 with only basic DORI would receive $ 54,000 in addition to the balance of his/her FSS account, for an annual premium of $60 deducted from his or her FSS account;



if the same firefighter had one unit of additional death and disability cover, this would increase to $92,000 for total annual premium of $120; and



if the same firefighter had the maximum 3 units of additional death and disability cover this would increase to $168,000 for a total annual premium of $240.



For a firefighter age 40, the comparative figures are $43,200, $73,600 and $134,400, for the same premium amounts.

5.4.1.2 Tax and preservation A member who qualifies for an insured TPI benefit would generally also be able to satisfy the preservation and tax requirements (see below in 5.4.2) for immediate release and a tax free post-30 June 1994 invalidity component. The rest of the lump sum benefit would be taxed as set out in Appendix 2). 5 . 4 . 2 Without insurance c o v e r

Without insurance cover, a member who ceases work because of invalidity may qualify to have the balance of his or her account released if the member is able to satisfy the trustee that he/she is unlikely, because of the ill-health ever again to engage in gainful employment for which the member is reasonably qualified by education, training or experience. To do so the member must have certificates from two qualified medical practitioners to that effect. Otherwise the whole of the FSS benefits would have to be preserved (unless the member had rolled in money from other funds which had a non-preserved component).

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5 . 4 . 3 Income protection benefits

These are payable for a maximum of 2 years to members with the relevant cover who are unable to perform the duties of their position. The benefit is either 50% or 75% of salary, as selected by the member. Income protection benefits are not subject to preservation, but are taxable as ordinary income. 5.5

Lump s u m death benefits

Lump sum death benefits in FSS are payable to the estate of the member. The benefit payable depends on the level of insurance, if any, the member had in FSS. 5.5.1 No insurance

The death benefit payable is the member’s account balance. 5 . 5 . 2 With insurance

The death benefit payable would be identical to the total and permanent invalidity benefit under various levels of insurance, as set out in section 5.4.1 above. 5 . 5 . 3 T a x a n d preservation

Lump sum death benefits are not subject to any preservation; they must be paid out and cannot be rolled over by the recipient(s). Lump sum death benefits are tax free if paid to a spouse or dependent child (under 18 years of age) or another person who was dependent on the deceased; otherwise it is taxed at an ordinary lump sum, except that the tax free component ($105,843 in 2001/2) does not apply. (See Appendix 2)

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Appendix 1: First State Super Emergency Services category - From 1 July 1998 Basic Death or Invalidity Cover * Age Attained Up to 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64

Additional Benefit Cover per unit

$ 54,000 50,625 50,625 50,625 47,250 43,200 36,450 30,375 24,975 20,250 17,550 14,850 12,150 10,125 9,450 8,775 8,100 7,425 6,750 6,075 5,400 4,725 4,050 3,375 2,700 2,363 2,025 1,688 1,688 1,350

$ 38,000 35,625 35,625 35,625 33,250 30,400 25,650 21,375 17,575 14,250 12,350 10,450 8,550 7,125 6,650 6,175 5,700 5,225 4,750 4,275 3,800 3,325 2,850 2,375 1,900 1,663 1,425 1,188 1.188 950

* Note Cover as applicable • to newly eligible members from 1 July, 1998, and •

pre-1998 members with continuous DORI cover who were actively at work on 1 July 1988

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Emergency Services - Income Protection Insurance Age attained

Annual premium per $1000 IP benefit

Age attained

Annual premium per $1000 IP benefit

15

2.49

40

3.80

16

2.51

41

4.07

17

2.55

42

4.39

18

2.58

43

4.75

19

2.60

44

5.15

20

2.64

45

5.61

21

2.57

46

6.18

22

2.51

47

6.80

23

2.45

48

7.54

24

2.39

49

8.44

25

2.38

50

9.41

26

2.32

51

10.56

27

2.28

52

11.89

28

2.24

53

13.41

29

2.28

54

15.18

30

2.32

55

17.18

31

2.38

56

19.49

32

2.47

57

22.12

33

2.58

58

25.10

34

2.70

59

28.46

35

2.83

60

32.28

36

3.00

61

36.58

37

3.15

62

41.40

38

3.34

63

36.56

39

3.57

64

13.21

31

Appendix 2

Taxation of superannuation lump sums and pensions

Lump sums Lumps sum payments from superannuation funds (Eligible Termination Payments –ETPs) can consist of a number of components which are taxed differently. The calculation of the components is generally based on the proportion of the member’s total ‘eligible service period’ that relates to each component. The eligible service period is the period of membership of the fund and any additional periods of employment to which the payment relates. As at 1/7/01, the relevant components of future limp sum benefit payments from NSW public sector schemes, and their respective tax treatment are as follows: 5.5.3.1 Component

Tax Rate

Post 30 June 1994 invalidity ,ie the proportion of an Invalidity benefit paid after 30/6/94 that relates to prospective service

Tax free

Pre 1 July 1983 component, ie the proportion of benefit that relates to service before 1 July 1983

5% included in income and taxed at member’s marginal rate

Undeducted contributions, ie the return of a member’s after tax contributions that were made after 30 June 1983

Tax free

Post 30 June 1983 component, ie the balance of the benefit

If paid under age 55:

20% plus Medicare Levy

If paid after age 55: First $105,843*

Tax free

Above $105,843

15% plus Medicare Levy

Any component in excess of member’s Top marginal tax rate (47% plus medicare Reasonable Benefit Limit (RBL) levy) *The low tax threshold is indexed annually to the growth in Average Weekly Ordinary Times Earnings

Lump Sum Death benefits are not ETPs and are generally tax free to dependants (ie legal or de-facto spouse, children under 18 and any other person financially dependent on the member at time of death (provided they are within the member’s pension RBL)) Lump sum death benefits to non-dependents are taxed like superannuation ETPs above, except that the whole of the post 30 June1983 component is taxed at 15%.

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Pensions Superannuation pensions generally consist of a Deductible amount and an Assessable amount. The deductible amount is tax free and represents the return of a member’s (post 30 June 1983) after tax contributions. It is calculated by spreading those contributions over the member’s life expectancy, and is fixed at the commencement of the pension. The assessable amount is the balance of the pension, and is included in the member’s ordinary income for tax purposes. However, a tax rebate of 15% of the assessable amount is available for pension payments if: •

The pension is paid from a complying superannuation fund



The pensioner is aged 55 or more when the payment is received, or the pension is a death or disability pension (where disability refers to a total and permanent disability as certified by two legally qualified medical practitioners )



The pension is within the recipient’s Reasonable Benefit Limit.

Commutations of pensions Lump sums paid in commutation of, or in lieu of a pension, are taxed as lump sums (Eligible Termination Payments) as set out on the previous page. This includes commutations of pensions paid to a dependant as a result of the death of the member or pensioner.

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Appendix 3 Comparison of tax and preservation impact on benefits in SSS, SASS, FSS and government and union proposals

Invalidity benefits – can be paid out in full if member has required medical certification for total and permanent invalidity Scheme

Preservation if member does not provide Tax without medical certification required medical certification

SSS

Small but growing part of invalidity pension accrued after 1/7/99 is subject to preservation, unless that preserved component is paid as a non-commutable pension

SASS/SPESS

Lump sum benefit partly subject to preservation (in respect of benefits accrued post 1/7/99)

Tax with medical certification



Some pension tax free as return of member contributions



Some pension tax free as return of member contributions



Remainder taxed at marginal tax rates.



Remainder taxed at marginal tax rates, but qualifies for

(See Appendix 2 for details)



15% rebate on tax.

Any lump sum benefit paid out:



Member post 30/6/83 contributions returned tax free

Part of benefit tax invalidity payment,



5% of Pre 1/7/83 component taxed at marginal tax rates

Member contributions returned tax free



5% of Pre 1/7/83 component taxed at marginal tax rates



Balance of any benefit paid out before age 55 is subject to tax at 20%.



Balance of any benefit paid after age 55 is tax free up to the low tax threshold ($05,843,in 2001/2), with the remainder taxed at 15%.

• • •



Balance of any benefit paid out before age 55 is subject to tax at 20%. Balance of any benefit paid after age 55 is tax free up to the low tax threshold ($105,843 in 2001/2), the remainder taxed at 15%.

free

as

34

Basic Benefit

Lump sum benefit largely subject to preservation

As for SASS lump sums above



As for SASS lumps sums above

Wholly subject to preservation

No tax while preserved.



As for SASS lumps sums above

No preservation applies to any benefits – not paid from superannuation fund.



Pension benefit ordinary income



Pension benefit ordinary income



Lump sum benefits tax free



Lump sum benefits tax free



Some pension tax free as return of member contributions





Remainder taxed at marginal tax rates.

Some pension tax free as return of member contributions Remainder taxed at marginal tax rates, but qualifies for 15% rebate on that tax.

(paid with SSS and SASS benefits) FSS Premier’s proposal

Dept

FBEU proposal

Invalidity pensions: • •



For ex SSS members outlined for SSS

–preservation

as

For ex-SASS members, the proportion of pension to be preserved would depend on the member’s non-preserved SASS benefit as at 1/7/99 –preservation likely to be higher than for ex-SSS members

taxed

as

• •

taxed

as

(See Appendix 2 for details)

For ex FSS and new members, pension would be wholly subject to preservation (assumes no non-preserved benefits rolled into FSS from other funds).

REPORT TO FBEU ON NSW PUBLIC SECTOR SUPERANNUATION

35

Death Benefits – are not subject to any preservation requirements Scheme

Tax

SSS



Reversionary pensions have tax free component representing return of contributions over life expectancy period



Remainder taxed as taxed as ordinary income, but eligible for



15% rebate on tax paid

SASS/SPESS

Lump sum benefit are tax free to spouse, children under 18 or other dependents Otherwise they are taxed as follows

Basic Benefit



Member contributions returned tax free



5% of Pre 1/7/83 component taxed at marginal tax rates



Balance of any benefit is taxed at 15% (plus medicare levy)

As for SASS lump sums above

(paid with SSS and SASS benefits) FSS Premier’s proposal FBEU proposal

As for SASS lump sums above Dept

Spouse Pensions taxable as ordinary income at marginal tax rates

Pensions taxed as for SSS.

36

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