Title:Important factors to be considered when placing Superannuation contribution
Introduction Superannuation is known as Super as well as the money that the employers contribute to the employee’s superannuation fund accounts while the employees work, and the employers pay 9.5% to the superannuation account of the total salary of the employees. The money from the superannuation can be used after retirement and, each employee can contribute their extra money towards super(QSuper Board, 2021).A defined benefit plan is a job retirement plan in which employee benefits are calculated using a formula that considers a number of factors, such as employment length and history of the salary. The company is accountable for overseeing the investment and risk of the plan and the company will normally appoint a manager from outside to do so(Kagan, 2020).An investment choice plan is the hybrid scheme which is the accumulation and defined benefit combined together where four types of investment choice strategies to choose from and that is Growth, balanced, conservative and cash and members can mix up all four investment choices or choose only one(StateSuper, 2021). Defined-Benefit plan A defined benefit plan, quite frequently known as a pension plan, provides secured retirement benefits for employees, and a defined benefit plan is funded by the company or employers in a large amount. This plan is a qualified employer- sponsored plan for the retirement of the employees and the employees are qualified to get certain tax benefits. The defined benefit plan is based on the factors such as the employment period with the company, the salary of the employees, and age as well. So, the company might offer a different plan which pays 1.5% of the average salary for the last five years of the employment year when you were working at the company and if you work for 20 years and then you may get 30% of the average over the years(Ashford, 2020).A defined benefit plan ensures a special benefit or payment on retirement and typically, the employer funds the plan by contributing a standard amount, normally a percentage of the employee's salary, to a tax-deferred account. Upon retirement, the plan will pay payments over the lifetime of the employee or as a lump-sum payment. For instance, a 30-year retirement pension plan may provide an exact dollar amount for the benefit, like $150 per month for each year of the worker's service. The plan will indeed pay the employee $4,500 per month when they retire. If the employee dies, a few other plans will allocate any residual perks to the beneficiaries of the employee.(Kagan, 2020).The defined benefit plan is managed by the employer so it is less risky for the employees and there is no cost for the employees. Pros of Defined Benefit plan A defined benefit plan delivers income in retirement without effort and cost, apart from turning up to work. And then that payment lasts for all across retirement, making it much easier to budget for retirement. You also can organise for a reduced payment to be made so that your family member will continue receiving income evenif you die first(CNN Money, 2021).Another advantage is that the employee will
always know about his amount that he will get when he will retire from the company and the benefit the employee gets from a defined benefit plan is different from stock market risk or up and down in the yield of the bond. The defined benefit plan gives a high return on investment and that includes premature death or any accidental death benefit to the family members of the employee. A defined benefit plan is stable and risk-free so, it promotes loyalty and retains the staff that is most valued in the company. The fund in the defined benefit plan is a collective investment that is managed professionally to generate a higher return and low expense(EDUCBA, 2020).When the employees make an extra contribution to the defined benefit plan, they usually get a tax deduction and the employee retirement benefits are not affected by market fluctuations(Ashford, 2020). Cons of Defined benefit plan Apart from the advantages of the defined benefit plan, there are some cons of it as well. In the defined benefit plan, the employees do not have any control over the fund as well as they have no idea where their funds are invested which is because the fund is managed by the professionals. Employees know exactly how much they will get after their retirement so they will not be able to increase the benefit (EDUCBA, 2020).In the defined benefit plan, there is a formula for the retirement benefit plan and that formula might change over time and the employee has to work for a longer period to get more percentage of their average salary which is hard to predict whether the employee would work for the longer period or he will leave early due to different circumstances(Adkins, 2020). Investment choice plan An investment choice plan is a type of superannuation fund that allows employees to choose from different types of investment in many asset classes and provides a wide range of investment options. In the investment choice plan superannuation, the employee may need to follow investment strategy while investing the funds in various financial products and the employees can switch to another fund for other suitable investment plans(Parliament of Australia, 2021).There are four member strategies for investment choices, and they are growth, balanced, conservative, and cash. If you want growth, he must invest around 85% in the shares or the properties and the rest 15% in the fixed interest or cash but if he wants a higher growth option, he can invest 100% in the shares or properties and that will give you a higher return for the longer periods of time. For the balanced, you are suggested to invest 70% in the share or property and 30% in the fixed interest of cash. For the conservative strategy, you have to invest around 30% in the share or property and 70% in the fixed interest or cash, and the last strategy for cash, you can make a 100% deposit in Australian deposit-taking institutes or in the capital guaranteed life insurance (MoneySmart, 2021).So, in the investment choice plan, you have plenty of options to choose from to invest in your superannuation.
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Pros of Investment choice plan An investment choice plan lets you choose from many investment plans and choices to invest your funds as you like and that is why you have more flexible options and more control over your funds. You can choose all four strategies of the investment plan and only one for your investment and target your return. While investing in different investment options, seeking professional advice from some advisors would be much more helpful while investing. You can use the funds on shares or properties as well as fixed interest or cash and get the return from it and you will always feel the control in your hands over your superannuation(StateSuper, 2021). Cons of Investment choice plan The return on investment all along depends on you as you choose the investment options and you invest it into different options of investment so, return on investment varies. Your one step can lead you to lose a certain amount of investment when you invest it as there are wide ranges of investment available for you to invest. And, the investment with high growth will have high risk over a short period of time (MoneySmart, 2021). Important factors to consider while choosing a Superannuation plan The defined benefit plan and Investment choice plan both are the superannuation funds that tertiary employees can choose and there are some important factors that they must consider while choosing between them: -In defined benefit plan gives the return to the employees without any effort and cost while their retirement so it is kind of hassle-free and mostly chosen super fund. -Though defined benefit plan is effortless and has less expensive, it is fixed and calculated by the formula and the employees know how much amount they get when they retire so there is no chance to get more or increase. -In the investment choice plan, you are free to choose any investment plan that is available to you. -You have more control over your investment, and you will always be able to move to another investment option when needed. -Even though you have more control over your funds in the investment choice plan, there are more risks present as well because you are the one who decides to invest in your superannuation but in the defined benefit plan, there are professionals who handle your investment, and they try to get more return for you from the investment and they are highly qualified. -In the investment choice plan, you can mix up all the four strategies to invest your funds or you can choose only one as you please and get more return with low risks. -Employer and their superannuation managing professionals have no part in the investment choice plan as they handle the funds in the defined benefit plan.
Recommendation -The employees are free to choose one plan for their superannuation whether they like the Defined benefit plan or Investment choice plan. -If they do not want to handle the unnecessary trouble of investing the funds, they can choose the defined benefit plan where they have to do nothing, and the employers would look after the funds. -In the defined benefit plan, the employers take the responsibilities of your superannuation and you get the final amount after you retire so it is an effortless and easy way. -An investment choice plan is in your hand and you are responsible for it and how you invest and control it. Conclusion To sum up, superannuation is the money that the employer contributes to the superannuation fund account of the employees every quarter, and the amount the employer contributes is 9.5% of the total salary. In the defined benefit plan, the employees do not require to use any effort or expenses for that and they get the total amount after their retirement. The employees are already known about the total amount that they are going to get and they do not have to contribute from their side and the employees have to stay with the company for a longer period to get more percentage of their average salary. However, in the investment choice plan, the members can choose from 4 strategies and invest their funds in different investment products available. The members have full control over their investment and they can manage their investment themselves so they can always switch to another plan if they wish but in a defined benefit plan the employees have no control over the investment as the professionals from the company manage and invest the funds in different types of stock markets. So, the employees should consider some important factors while deciding whether to choose a defined benefit plan or an investment choice plan.
References Adkins, T., 2020.The Rise, Fall, and Complexities of the Defined-Benefit Plan.[Online] Available at:https://www.investopedia.com/articles/retirement/10/demise-defined-benefit- plan.asp [Accessed 19 01 2021]. Ashford, K., 2020.What Is A Defined Benefit Plan?.[Online] Available at:https://www.forbes.com/advisor/retirement/what-is-a-defined-benefit-plan/ [Accessed 19 01 2021]. CNN Money, 2021.Ultimate guide to retirement.[Online] Available at:https://money.cnn.com/retirement/guide/pensions_basics.moneymag/index9.htm [Accessed 19 01 2021]. EDUCBA, 2020.Defined Benefit Plan.[Online] Available at:https://www.educba.com/defined-benefit-plan/ [Accessed 19 01 2021]. Kagan, J., 2020.Defined-Benefit Plan.[Online] Available at:https://www.investopedia.com/terms/d/definedbenefitpensionplan.asp [Accessed 18 01 2021]. MoneySmart, 2021.Super investment options.[Online] Available at:https://moneysmart.gov.au/grow-your-super/super-investment-options [Accessed 19 01 2021]. Parliament of Australia, 2021.Chapter 4 - Member investment choice and the role of the trustee. [Online] Available at: https://www.aph.gov.au/Parliamentary_Business/Committees/Joint/Corporations_and_Financial_Se rvices/Completed_inquiries/2004-07/superannuation/report/c04 [Accessed 19 01 2021]. QSuper Board, 2021.What is superannuation.[Online] Available at:https://qsuper.qld.gov.au/super/what-is-superannuation [Accessed 18 01 2021]. StateSuper, 2021.Home SASS Contributions Investment choice.[Online] Available at:https://www.statesuper.nsw.gov.au/sass/contributions/investment-choice [Accessed 18 01 2021].