At the heart of Australia’s unique and ever-contentious superannuation system is a grand bargain. Workers must by law forfeit their own wages in the present to prepare for the future, but in exchange receive favourable tax treatment.
That was the historic deal struck in 1985 by the Labor government with unions and business. But 40 years later it is potentially being undermined by a widespread but under-the-radar practice by superannuation funds.
Analysis by The Conexus Institute* suggests there are at least 40 funds that insist on a minimum account balance of at least $10,000 to apply for an account-based pension. Four funds – AustralianSuper, HESTA, Fiducian and Russell Investments iQ Retirement – have a minimum application balance of $50,000.
Regulators and consumer groups have been warning for some time that there are around 1 million Australians who are still in accumulation mode despite qualifying for pension phase as they are over 65, meaning they are missing out on tax benefits.
I have sat in conference halls while industry executives have tut-tutted along, shaking their heads in shared concern with the authorities at this travesty – all the while knowing they are implementing a potential obstacle that is seemingly contributing to members being held captive in accumulation mode against their best interests. Or worse, these members may be effectively nudged out of the system, with their life savings in a rucksack.
David Bell and Geoff Warren of The Conexus Institute estimate that the different tax treatment in moving from accumulation to pension phase can add a 0.5 per cent uplift to a member’s annual investment return.
But this tax benefit is not just a financial calculation, leaving members marginally better off. It is fundamental to the underlying promise of superannuation – the promise that forgoing 10 per cent or 12 per cent – or, if some zealots get their way one day, 15 per cent – of wages will come with an explicit tax trade-off.
Given the compulsory nature of our system, moving into pension phase should be seen as a birthright, not a mere financial decision.
What’s worse, the practical reality of these volume-based restrictions are that the very poorest and most vulnerable in our society – those who the architects of the system likely had in mind during those decades of tense and contentious negotiation – are effectively blocked from one of its key benefits and design features.
Some in the industry may say the matter is largely moot, since an account balance of $50,000 or less may seemingly not provide for much of a pension anyway. But, as the government’s 2021 Retirement Income Review concluded, even relatively minor windfalls can make an outsized difference to peoples’ financial lives. And this is especially true of the most financially disadvantaged.
Regardless, it is the principle that is at stake. Whether a superannuant has $1 or $1 million in their account, they are equally deserving of being subject to the benefits of the system. Regardless of how much money an individual may have, their retirement savings add to the pool from which the industry’s salaries (and executive bonuses) are drawn.
There is a principle at stake also in the transparency – or lack thereof – with which these hidden minimums are being maintained.
Very few of the relevant funds advertised these restrictions prominently on their website, with the majority opting to hide them deep in their product disclosure statements, where only researchers, activists or journalists could ever find or understand them – and thankfully did.
Presumably the restrictions are in place to cover the administrative burden of servicing members that are deemed uneconomic, as well as wanting to avoid cross-subsidisation of low-balance members by others. Or maybe they just think they know better than the members in this cohort.
There may be some elements of accuracy or fairness to these considerations, but they all pale in comparison to the underlying financial rights of the member and the fiduciary duty trustees hold.
Many in the super system think of themselves as member-centric and driven ultimately by the public interest, and mostly this is a fair self-assessment.
But placing obstacles which might in any way prevent a member from full participation in the system, and then burying those terms in legal documents, is a move straight out of the Wall Street playbook and out of step with the spirit of a paternalistic, default system.
*The Conexus Institute is an independent think-tank philanthropically funded by Conexus Financial, the publisher of Professional Planner.
This is an absolute nonsense article: take the $5,000 or 10,000 or whatever and invest it, if you wish, take drawings that you nominate if you wish and guess what —with these amounts it would not be at all possible to attract a tax liability so what is the problem and how are such people disadvantaged in any way?
me-thinks that the ‘think tank’ has lost its ability to think logically .
There are much bigger problems in the super system than this. If a person has less than $50k in super and rely on government transfer payment for cashflow support, an additional $50k held outside of super is neither here nor there. The added tax free status of retirement phase income streams is not the issue here. The APRA funds apply a crediting rate based on the investment strategy which, for a <$50k balance wouldn't be tied up in growth assets etc. Please, spend time looking into things that matter. Australians really have become a nation of entitled wingers. Even the smallest matter must be amplified and "fixed" and invariably the fixer is identified as the "government".
100% agree! I would wager that most of the accounts sitting in accumulation are not there by conscious choice but because the owner probably doesn’t even know the funds are there, or what their options are. The focus should be on these funds ensuring their clients are aware of the options and of course, encouraging them to seek advice.