In this guide
- Defined contribution or defined benefit: What’s the difference?
- Where are you on the road to retirement?
- Who has a defined benefit?
- How benefits are calculated
- Hybrid funds
- What happens when you leave the employer providing your defined benefit before you retire
- What a defined benefit means for your options with super at retirement
- How defined benefits are taxed
- Get more guides like this with a free account
Superannuation has existed in Australia since 1862. For more than a century, most funds provided defined benefits (DB), but very few employees were covered. Super was a privilege largely reserved for high-ranking white-collar workers and government employees.
In 1986, superannuation became a workplace entitlement for many Australians through a compulsory contribution tied to certain awards. Award super was quickly followed by the universal superannuation guarantee (SG) in 1992. The introduction of award super and SG led most employers to move away from providing defined benefits because it was difficult and expensive for these funds to accommodate the extension of super to all employees. This led to the widespread adoption of the defined contribution (DC) model, also known as accumulation. Today, most Australians only have DC super accounts.
When you’re saving for and planning your retirement, it’s important to know how the amount you receive from your super fund will be calculated and what that means for your options. You could be entitled to your accumulated balance, a defined benefit or a mix of both.
Defined contribution or defined benefit: What’s the difference?
The key difference between a DB fund and a DC fund is the method used to decide what members are entitled to.
In a defined contribution (DC or accumulation) fund, it is the amount your employer is required to contribute to the fund for you that is ‘defined’. Most employers pay only the required superannuation guarantee, which is 12% of your qualifying earnings. Some choose to provide a higher contribution rate to attract and retain staff. After the contributions are made, your employer has met their obligations, and the rest is up to you.
In a defined benefit (DB) fund, it is the final amount you must receive that is defined. The required amount is calculated by a formula set in the fund’s rules.
For defined benefits that are fully funded, the employer has to contribute enough to finance the final payments that will be due to the members when they retire or stop working for the sponsoring employer. The amount the employer needs to contribute changes over time based on the fund’s total assets and what is owed to members.
Some defined benefits for government employees are unfunded. The super funds themselves don’t hold invested assets, so the final benefits are paid to members from the government when they fall due. In 2006, the Future Fund was established to assist future governments to meet unfunded defined benefit obligations and other requirements.
Where are you on the road to retirement?
Retirement planning isn’t the same for everyone.
Take our 2-minute quiz to find out which stage you’re at and what you could focus on next.
Who has a defined benefit?
People who joined their first super fund before the superannuation guarantee was introduced in 1992 are most likely to have at least part of their super in a defined benefit. However, joining later doesn’t rule it out. For example, new Australia Post employees were added to a DB fund until 2012, and some university staff still join a defined benefit division of UniSuper when they start work today.
Defined benefit funds were most common for governments (both state and federal), and large companies like banks, BHP, Qantas, Telstra and Nestlé. They’re also commonly found for employees of companies delivering services that were originally provided by government but were then privatised, such as electricity and post.
If you have a defined benefit, you’re most likely already aware of it because they are so unusual today.
How benefits are calculated
Defined contribution (DC)
In a defined contribution super fund, your benefit is simply what has accumulated from your super contributions and investment earnings, less fees, taxes and insurance premiums.
You choose how your money is invested and your balance fluctuates with the value of those assets. In this type of fund, the investment risk is being taken by you. You could achieve good returns and accumulate a large balance, but poor returns or a badly timed crash may leave you with less at retirement than you hoped.
Defined benefit (DB)
In a defined benefit fund, your super benefit is calculated using a formula. The calculation usually involves your salary near the time you leave employment or retire, your length of service and an accrual rate or percentage. The average percentage of salary that you have personally contributed to the fund over the years can also have an effect. In this type of fund, it is the employer that is exposed to the investment risk.
The formula used is different in every fund. Some calculate a lump sum amount while others provide an annual pension. Pensions are generally indexed with increases in CPI after payments begin so your income keeps its buying power.
A portion of your defined benefit may be subject to a vesting schedule. The schedule controls when the full benefit becomes available. For example, you may be entitled to 50% of the benefit if you leave the employer during the first 10 years, then a further 5% each year until the full benefit is available after completing 20 years of service.
Defined benefit funds also usually have a built-in ‘failsafe’ designed to make sure the final payment is not less than you would have received if SG contributions were paid to a DC fund. This is known as the minimum requisite benefit (MRB). If the MRB is more than the amount calculated using the formula, you will receive the MRB instead.
Hybrid funds
A hybrid fund provides both a defined benefit and an accumulated balance. A common example is funds that added a 3% ‘productivity contribution’ when award super was introduced in 1986. The productivity contribution accumulates alongside the defined benefit and is available on top of the formula-based benefit. Other funds allow their members to add voluntary contributions.
Members may be able to choose the investment strategy for the accumulation or DC portion of their account.
What happens when you leave the employer providing your defined benefit before you retire
Defined benefits generally operate most effectively when you work for the sponsoring employer for a long time and stay there until retirement. However, leaving your job earlier is common and doesn’t mean you lose out completely.
Funds that use a lump sum formula can generally calculate and pay your benefit no matter when you leave the sponsoring employer. If you’re under 60 when you leave your job, the amount will be available to roll over into a defined contribution fund where you can choose your investments and continue to make contributions.
Those that provide a lifetime pension can be trickier to navigate. Options vary depending on the fund and can include:
- Preserving your benefit in the fund to claim your pension when you reach retirement age
- Taking a lump sum equivalent value that can be rolled over to a new fund
- A combination of both.
You may need to make a choice quite quickly after leaving, so find out your options and plan in advance if you can. The wrong choice could leave you significantly worse off.
What a defined benefit means for your options with super at retirement
Your options at retirement depend on the design of your fund.
If your final benefit is calculated as a lump sum amount, you will have all the same choices as someone in a DC fund. You can take a lump sum, open an income stream or a combination of both.
In a hybrid fund, you will usually also have these options for any portion of your total fund that is accumulation or DC style.
When your fund is designed to pay a pension, you may have no choice but to receive those regular payments. In other cases, you may be able to convert your pension entitlement into a lump sum you can take in cash, use to purchase an alternative income stream or a combination of both. If you have the option to convert a pension to a lump sum, be sure to take specialist advice before deciding.
How defined benefits are taxed
Many defined benefits are not taxed any differently from other super, but in some cases, there is more tax to pay when you withdraw your money.
If your benefit is in a taxed fund using a lump sum formula, your withdrawals are tax free from age 60. This is the same treatment that applies for most other people.
When you’re entitled to a defined benefit pension from a taxed fund, your pension income is tax free up to the defined benefit income cap (currently $131,250 per year in 2026–27). Half of any amount above the cap must be declared and is taxed at marginal rates. The defined benefit income cap is used to apply fairer tax treatment to people with defined benefit pensions that have an equivalent lump sum value above the transfer balance cap.
Some super funds for government employees are untaxed. These funds have not paid tax on contributions and investment earnings, so tax is instead applied when you withdraw your benefits. Because many defined benefit funds are for government employees, it is more common for them to be untaxed than it is for DC funds.
When you receive a pension from an untaxed fund and you’re aged 60 or more, the income is taxed at marginal rates with a 10% tax offset. The offset is capped at a maximum of $13,125 in 2026–27.
If you take a lump sum from an untaxed fund when you’re 60 or more, it will be taxed at 15% up to the untaxed plan cap and 45% for any amount above the cap. The Medicare levy applies on top of these rates. You also have the option to transfer your lump sum to a taxed fund. The same rates of tax, but not the Medicare levy, apply to amounts you roll over. Once your money is in a taxed fund, future withdrawals will be tax free.
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