Defined benefit income streams usually come from an employer super fund or a government employee super scheme and provides a regular income to an individual during their retirement years.
They're becoming less common and are predominantly held by older people who've been long term-employees.
Some of it's characteristics include:
Guaranteed Income: The individual receives a guaranteed income for life or a specified period, regardless of market performance or investment returns. The income amount is predetermined based on factors such as the individual's salary, years of service, and a formula specified by the scheme.
Employer-sponsored: Often provided by employers or government organisations as part of an employee's retirement benefits. These schemes aim to provide a stable income to retirees based on their years of service and salary history.
Income Calculation: The income payment is calculated based on a formula that considers factors such as final average salary, years of service, and a predetermined accrual rate. The formula may vary depending on the specific scheme or plan.
No Investment Risk: Unlike some other retirement income products, the investment risk associated with a defined benefit income stream is borne by the employer or the organisation offering the scheme. The retiree receives the specified income regardless of the underlying investment performance.
Limited Flexibility: Generally offer limited flexibility compared to other retirement income options. They typically provide a fixed income amount without the ability to make changes to the payment frequency or access a lump sum withdrawal.
Portability and Commutation Options: In some cases, individuals may have the option to commute or convert a portion of their defined benefit income stream into a lump sum or transfer it to another superannuation account. However, the specific rules and availability of these options vary depending on the scheme or plan.
Taxation: Calculating the tax-free portion of a defined benefit income stream is very complex and is done by your fund. They’ll send you a statement which shows what you’re getting and how much of it is taxable and tax free.
Tip: because of their unique nature and special benefits, it's never a good idea to exit one (ie commute) without seeking professional advice first.