Case Study: DFRDB

Calculating Anthea’s retirement pay (full pension)

Anthea’s retirement pay is based on her super salary* and her years of service. It’s calculated as super salary x service factor (see service factor table below).

Anthea’s super salary is $100,000.00 and the service factor for her 38 years of effective service is 70.50%.

This means she will receive a yearly lifetime pension of $70,500 ($100,000 x 70.50%). 

Her retirement pay will become payable the day after the date of her transition from the RAAF. Most of the pension will be indexed on the first pension payday in January and July each year. However, there is some money that would not be indexed if Anthea did not commute less than four times her retirement pay. 

Anthea’s fortnightly pension is subject to Pay As You Go (PAYG) tax deductions in the same way her salary is subject to tax assessment.

*Super salary is the maximum incremental rate that applies to a member’s rank. It includes any recognised allowances.

Commutation option

Commutation gives Anthea the option of converting part of her retirement pay of $70,500 to a lump sum. This will permanently reduce her pension amount but will give her immediate access to a substantial amount of cash. 

Lump sum

DFRDB allows up to 5 times the retirement pay to be commuted.

Anthea’s adviser commutes the maximum of 5 times her retirement pay. This gives Anthea a lump sum of $352,500 ($70,500 x 5).

Reduced pension

Life expectancy is taken into account when calculating the reduced pension payable after commutation. See the life expectancy table.

To calculate the amount of Anthea’s pension after commutation, her commuted lump sum is divided by her life expectancy factor of 22.79. This comes to $15,468 ($352,500/22.79) which is then deducted from her original retirement pay.

This gives Anthea a reduced lifetime pension of $55,032 ($70,500 – $15,468).

If this amount isn’t enough to meet Anthea’s needs, her adviser can work out other commutations based on less than 5 times her retirement pay.

Reduced pension = retirement pay – (commuted lump sum/life expectancy).

Anthea’s final benefit using commutation 

By commuting 5 times her retirement pay, Anthea will receive:

• a lump sum of $352,500 immediately after she retires; and
• a lifetime pension of $55,032 payable immediately after she retires.

Anthea is also entitled to a productivity benefit paid by DFRDB in addition to the pension and commutation. The productivity benefit is only payable as a cash lump sum or rollover into a complying super fund. Anthea must roll over the productivity benefit and can access this benefit as cash when she reaches her preservation age of 60. 

Notifying CSC 

Anthea has a set period of time in which she can notify CSC of her decision to commute part of her pension.

If she wants the commutation to begin immediately after she retires, she must let CSC know within three months before the date of her transition from the RAAF.

If she takes her retirement pay as a full pension and then decides she’d prefer commutation, she has 12 months from the date of her transition to let CSC know.

Her retirement pay will be reduced from the date her commutation takes effect.