After 25 years working with public sector super, and as a PSS member myself, I’ve learned one thing: the obvious PSS option isn’t always the best one.
PSS is an incredibly valuable scheme. It’s also complicated, and some decisions are difficult or impossible to undo once you retire.
Here are 11 things I think senior public servants should consider before making their next PSS decision.
1. Your PSS contribution doesn’t have to be your only super contribution
Your regular PSS member contribution is only one part of the picture.
Depending on your circumstances, you may also be able to make additional concessional or non-concessional contributions to a separate accumulation super account.
I recently advised a client to contribute an additional $15,000 to super, generating approximately $5,000 in tax savings.
The important part is looking at your contribution caps, tax position and retirement strategy together.
2. Plan around your total taxable income, not just your PSS pension
A $100,000 PSS pension doesn’t necessarily mean $100,000 in your bank account.
If you retire before 60, tax can make a significant difference to what you actually have available to spend. Even after 60, part of a PSS pension can remain taxable.
But there’s another trap I regularly see.
Your taxable PSS pension components are added to your other taxable income for the financial year.
That might include employment income, rental income, dividends, investment income and interest from bank accounts.
CSC generally withholds tax based on the pension it is paying you and the information you have provided to them.
It doesn’t know your complete tax position.
I’ve seen PSS pensioners surprised by tax bills because the tax withheld from their pension wasn’t enough once their other income was added.
This is something we specifically plan for with Thomson Wealth clients. We model the total taxable income for the year, not just the PSS pension.
Always plan around your after-tax retirement income, not simply the pension quoted by CSC.
3. Your PSS pension is also an estate-planning decision
PSS doesn’t work like an ordinary accumulation super fund where you can simply nominate whoever you want to receive your benefit.
Scheme rules determine who is eligible to receive benefits, generally an eligible spouse and/or eligible children.
That can become particularly important if you’re single, in a newer relationship, have adult children or want greater control over where your wealth eventually goes.
In some circumstances, taking part of your benefit as a lump sum can provide significantly more estate-planning flexibility.
4. Rejoining the APS for a short time probably won’t make you a millionaire
I hear variations of this one regularly.
Someone has a preserved PSS benefit and has been told:
“Just go back to the public service for a year or so and your PSS will skyrocket.”
Sometimes rejoining can improve the outcome. But it is not automatically the PSS jackpot people imagine.
Your benefit depends on your Final Average Salary, Accrued Benefit Multiple, Preserved Benefit Multiple, contribution rate, service history, hours worked and the timing of your re-entry.
Before making a career decision based on your PSS, run the numbers.
5. Taking the maximum pension isn’t automatically the best option
The full PSS pension is attractive. Guaranteed lifetime income is valuable. And yes, to those who love their numbers, it can be worth alot over your lifetime.
But that doesn’t mean you should automatically take the maximum pension available.
For some clients, a part pension and part lump sum produces a better overall outcome.
They may want to repay debt, create liquidity, invest outside super, improve estate-planning flexibility or better coordinate PSS with their spouse’s super and other investments.
The decision should be made as part of your overall financial position, not by looking at your PSS in isolation.
6. Understand the super caps before starting your pension
This becomes particularly important for senior public servants with substantial super outside PSS.
Starting a PSS pension can use a significant amount of your transfer balance cap because defined benefit pensions have special valuation rules.
That can affect how much of your other super can move into retirement phase.
Your broader super position can also affect future contribution opportunities and, for people with larger balances, Division 296 tax considerations.
The order in which you do things can matter.
Before starting your PSS pension, understand what it does to the rest of your super strategy.
7. Going part-time doesn’t necessarily affect PSS the way you think
This is one of the more misunderstood areas of PSS.
Your Final Average Salary is generally based on your full-time-equivalent super salary, so simply moving part-time doesn’t necessarily reduce your FAS.
However, your contributions and the rate at which your Accrued Benefit Multiple grows can be adjusted for your part-time hours.
The timing can matter, particularly if you’re planning to phase into retirement, work part-time or take extended periods of leave.
Don’t assume fewer hours automatically means the same PSS outcome.
8. Contributing 10% isn’t always the smartest choice
PSS members can generally elect 0%, or a whole percentage between 2% and 10%.
A higher contribution rate can increase the rate at which your PSS benefit grows.
But more isn’t automatically better.
I’ve advised clients to reduce their PSS contribution rate because they were already on track for retirement and that extra cash flow could be put to better use elsewhere.
Sometimes paying down the mortgage, investing outside super or simply improving family cash flow is more valuable than maximising PSS.
Your contribution rate should have a purpose.
9. Don’t automatically pay a surcharge debt the obvious way
Some long-term PSS members still have a superannuation contributions surcharge debt.
Depending on your circumstances, there may be different ways that debt can be dealt with, and those choices can have different tax consequences.
I recently helped a client improve his outcome by approximately $1,800 simply by choosing the more appropriate approach.
It’s a small decision that is easily overlooked.
10. The pension and lump-sum mix can be worth tens of thousands in tax
This is where PSS planning becomes particularly valuable for high-income public servants.
Your PSS pension doesn’t exist in isolation.
It interacts with your salary, other super, investment income, taxable pension components, lump-sum choice and the timing of retirement.
I recently worked with a high-income client with a substantial PSS benefit and identified approximately $50,000 in potential tax savings over five years by carefully structuring the pension and lump-sum mix.
That wasn’t achieved by finding a loophole.
It came from modelling the choices before the client made an irreversible decision.
11. Don’t let PSS become your golden handcuffs
This one is personal.
PSS is valuable. The employer-financed benefit can be significantly more generous than simply receiving the Super Guarantee, and the lifetime indexed pension is an incredible retirement benefit.
But I genuinely don’t believe someone should stay in a career that makes them unhappy just because of their PSS.
I know what those golden handcuffs can feel like.
I left the public service and PSS myself. Today I run my own business, and the creative freedom of the private sector has allowed my career to grow in ways I never imagined while I was in the APS.
Leaving PSS doesn’t mean giving up on building wealth or having a great retirement.
There are plenty of strategies outside a defined benefit scheme to continue building wealth, investing for the future and staying on track for retirement.
And if you leave eligible employment and preserve your PSS benefit, it can continue to grow under the scheme rules. If you later return to eligible Australian Government employment, you may also be able, or in some circumstances be required, to rejoin PSS and build on your benefit again.
So if you’ve ever caught yourself thinking:
“I’d love to do something different, but I can’t leave my PSS...”
maybe the answer isn’t automatically to stay.
Maybe it’s to build a financial plan that gives you the confidence to understand what leaving really looks like.
Your super is important.
But so is the life and career you build along the way.
The takeaway
PSS is valuable, but it’s also complex.
The best option is rarely determined by one rule, and it certainly shouldn’t be based on what a colleague down the corridor did when they retired.
For senior public servants with a significant PSS benefit, other super, investments or a high income, these decisions can be worth tens of thousands of dollars.
And sometimes the biggest decision isn’t about PSS at all.
It’s whether your finances give you the freedom to make the career and lifestyle choices you actually want.
Before you make an irreversible PSS decision, model the tax, cash flow, super, retirement and estate-planning consequences together.
If you have a significant PSS benefit and are starting to think seriously about retirement, or wondering whether you can afford to leave the APS altogether, this is exactly the type of planning we specialise in at Thomson Wealth.
This information is general in nature and does not take into account your personal objectives, financial situation or needs.