An outdated quirk in the superannuation system could be costing low-income retirees thousands of dollars.
Eight of the ten biggest super funds still require you to have a minimum balance to open what is called an 'account-based pension'. This is what most people move their super into during the 'retirement phase' of the superannuation journey.
Some funds have recently moved to significantly lower the minimum amounts after the practice was called out by the advocacy group Super Consumers Australia (SCA) and media outlets, but requirements of $10,000 to $30,000 still remain. Just two of the top ten funds have no minimum requirements at all.
Advocates are calling for super funds to rethink and scrap account-based pension minimums altogether
For those in the 'accumulation phase' of superannuation who are unable to open a retirement account in their current fund because of these super fund rules, it means being slugged with higher tax rates, despite the fact that these people with lower balances need to stretch each dollar further after stopping work.
Advocates say this system needs to change and are calling for super funds to rethink and scrap account-based pension minimums altogether.
What are account-based pensions?
Account-based pensions are designed to be a simple and flexible way to get a regular income stream in retirement.
You can get an account-based pension from a superannuation fund. The account-based pension will make a regular deposit into your nominated bank account, and you can choose how often you get this money – monthly, quarterly or yearly.
These accounts are designed to be flexible. You can select how much you get for each payment (as long as you meet the government's minimum drawdown requirements).
Account-based pensions are designed to be a simple and flexible way to get a regular income stream in retirement
You can also withdraw more money at any stage – for example, if you have an unexpected expense or decide to take a holiday. Or you can close down the pension and get your remaining super as a lump sum. Your account-based pension will stop paying you once you run out of super.
Confusingly, some funds have different names for these accounts, such as 'retirement income account', 'income stream' or 'super income stream'.
Saving on tax
Everyone over the age of 65 (or 60 if you've stopped working) pays no tax on super withdrawals. But the income your superannuation makes while it's sitting in the account (that is, the interest) will be taxed if you remain in the accumulation phase.
For many who are no longer working and are of the eligible age, it's beneficial to move into the retirement phase – if your super fund will let you
That tax rate is 15%, compared to 0% in the retirement phase when your super becomes an account-based pension. That's why for many who are no longer working and are of the eligible age, it's beneficial to move into the retirement phase – if your super fund will let you.
Analysis in 2024 by Super Consumers and The Conexus Institute found that a member with a $20,000 super balance could be more than $2300 worse off over the course of their retirement because of the tax liabilities of staying in the accumulation phase.
High-barrier funds lower their minimums
When Super Consumers highlighted this issue last year, Australian Super and Hesta were the funds with the highest mandatory minimums. They required a $50,000 balance to open an account-based pension.
Both funds have since told CHOICE they would be dropping their minimum balance requirements to $10,000, but not to zero.
Australian Super and Hesta have told CHOICE they would be dropping their minimum balance requirements to $10,000, but not to zero
A spokesperson for Australian Super, the largest super fund in the country, says "managing fairness and equity across the fund's more than 3.5 million members is complex" and that any "cross-subsidy", where the cost of servicing some members' accounts are covered by the larger group, needed to be taken into consideration.
They added that having no minimum increased the prospect that retirees could face "meaningful fee erosion" of their savings due to the small account balances.
Hesta says it is "confident this change [from $50,000 to $10,000] strikes the right balance" of ensuring individual needs of customers are met.
Super funds respond
Since the recently announced changes, the major super fund with the highest minimum balance, at $30,000, is now Australian Retirement Trust (ART). We sent questions to all the major funds with minimum requirement rules, asking them to justify the minimum. ART did not respond other than to say the policy was "currently under review".
Several other funds said the practice was an industry norm, something Katrina Ellis, deputy CEO of Super Consumers, says is a poor excuse.
"I don't think it should be up to the trustees – the super funds – to decide who can move their money into the tax-free retirement phase. People should have the freedom to decide where they want to put their money and in what type of account as they move into retirement," she says.
An issue of fairness
David Bell, executive director of The Conexus Institute, says the tax benefits of moving into an account-based pension could be several hundred dollars a year in the pocket of retirees, which is "nothing to sneeze at in a cost-of-living crisis".
"This industry contains a lot of people who are well paid and they have to have the perspective of people who are less well off. You've got to be careful of making financial judgements about what matters," he says.
Bell says the fair approach would be for all superannuation funds to adopt a no-minimum-balance approach to opening an account-based pension.
We don't think anyone should be denied access to the full taxation benefits of the superannuation system
David Bell, The Conexus Institute
"We have a view that no Australian should be precluded from accessing an account-based pension. Why should anyone be precluded from it? We don't think anyone should be denied access to the full taxation benefits of the superannuation system," he adds.
Super Consumers' Ellis agrees with the principle.
"Superannuation is complex, too complex, and minimum balances are making an already complex system more difficult at a time when people need to make tough decisions about their retirement," she says.
"We need to be making it simpler, and getting rid of minimum balances would help do that."
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Stock images: Getty, unless otherwise stated.
