Super funds that impose minimum balances can cost you thousands in retirement
Super Consumers Australia says all funds should allow eligible members to open account-based pensions to access tax breaks.
Need to know
- Retired Australians can usually move their super into an account-based pension and pay less tax on their retirement income
- But some super funds have introduced a minimum balance to move into these accounts, meaning not everyone can benefit from the tax savings
- Super Consumers Australia says funds should let all members open an account-based pension, regardless of their balance
The general idea with super is that there are two phases:
- the ‘accumulation phase’, where you’re working and building up future retirement income
- the ‘retirement phase’ (or ‘pension phase’), where you can spend your retirement income.
Despite the name, you don’t always have to be completely out of the workforce to move into the retirement phase. The graphic below shows when you can access your super.
Accessible Version
You can get your super once you’re in the retirement phase, but this isn’t as simple as just ending work. This decision tree will help you work out if you’re eligible to start accessing your super:
Are you 55 or under?
Yes – you can only get your super in limited circumstances e.g. financial hardship.
No – go to next question
Are you 55 to 60 and still working?
Yes – you can get a ‘transition to retirement’ account and keep working.
No – go to next question
Are you 60 or over and have stopped working?
Yes – you can get your super if you’ve stopped work (even if you start working again)
No – go to next question
Are you 65 or over?
Yes – you can get your super
Your options when you retire
When you enter the retirement phase, you have a few different options with your super. You can:
- leave it in the accumulation phase
- move it into an account-based pension
- withdraw it as a lump sum (e.g. to pay off your mortgage)
- buy an annuity or other retirement income product.
You don’t need to pick just one of these options. A combination of the above may best suit your needs.
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 super 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).
Confusingly, some funds have different names for these accounts, such as ‘retirement income account’, ‘income stream’ or ‘super income stream’
You can also withdraw more money at any stage (for example, if you have an unexpected expense or decide to take a holiday) or 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’.
Tip: Moneysmart has an account-based pension calculator that shows you how much income you can expect from your account-based pension.
Account-based pensions can save you on tax
It’s important to understand the difference between earnings and income in this context.
Earnings are the interest your super earns while it’s invested. Income is the money you withdraw from your account.
If you’re over 65 (or 60 if you’ve stopped working), you don’t pay tax on any income from your super, whether you take this money out from the accumulation phase or an account-based pension.
However, earnings are taxed differently between the accumulation and pension phases. If you keep your super in the accumulation phase, the earnings will be taxed at 15%. But if you’re in an account-based pension, you don’t pay any tax on these earnings.
Which funds have minimums for account-based pensions?
Analysis by Super Consumers Australia and the Conexus Institute found that a whopping 80% of funds have minimums in place that prevent some members moving into an account-based pension.
Major funds like AustralianSuper and HESTA have a minimum of $50,000 and Australian Retirement Trust has a $30,000 minimum.
A member with $45,000 could end up with more than $5000 less in retirement income
Analysis by Super Consumers Australia 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 implications of these minimums. Similarly, a member with $45,000 could end up with more than $5000 less in retirement income.
The following table shows that nine of the top 10 funds (by number of member accounts) have a minimum.
Accessible Version
Fund Minimum to open an account-based pension
AustralianSuper $50,000
Australian Retirement Trust $30,000
REST $10,000
Hostplus $10,000
Aware $20,000
HESTA $50,000
Mercer $10,000
United (Cbus) $10,000
Nulis Nominees (MLC) na
Unisuper $25,000
Why members may face a ‘double whammy’
As we’ve previously covered, many funds now pay their members a ‘retirement bonus’ when they move into the retirement phase.
When funds block members with low balances from entering the retirement phase, they also prevent them from getting the retirement bonus.
Making matters worse, this ‘double whammy’ only impacts the members who can least afford it – those with lower balances.
How to find out if your fund has a minimum for account-based pensions
Your fund should disclose any minimum in the relevant product disclosure statement (PDS). However, these documents are not always easy to find or read.
If you’re unsure, contact your fund for further information.
Towards a fairer system: No minimums for account-based pensions
Super Consumers Australia deputy director Katrina Ellis urges funds to drop these minimums urgently.
Ellis says the regulator, Australian Prudential Regulation Authority (APRA) should take action against funds who have these minimums, including forcing them to drop the minimum requirements and compensating those members who have missed out on tax benefits because of this rule.
“These minimums are clearly not in the best interests of members,” Ellis says. “Funds are forcing Australians to pay unnecessary tax on their hard-earned retirement income.”
“Everyone with super, regardless of their balance, should be able to take advantage of the tax benefits they’re entitled to.”
