Time to scrap pension fee trap

For those caught in this nasty fee trap only a change of legislation can solve the issue.

Imagine being retired for many years and paying massive fees on a super plan that no longer suits you, that nobody sells anymore and that you simply cannot exit because the market moved on and forgot about you.

Investors are more alert than ever to unreasonable fees, but the legacy of complying pensions in the local market has left an elderly generation of investors who are paying an outsized penalty on outdated products.

The problem goes back to pension arrangements for self funded retirees, which peaked in popularity roughly 20 years ago.

At the time, complying pensions offered a seductive combination of tax advantaged superannuation with a linked exemption on the assets tests required to receive the government pension.

But to get one of these complying concessions there was a catch - you had to sign up effectively forever.

“To qualify for these special concessions, they had to meet strict criteria making them long term pensions or annuities designed to pay income over the individual’s (and possibly their spouse’s) life with very limited access to lump sums. Once in, the individual generally cannot pull out of them, ” says Alex Denham senior SMSF specialist at the Heffron Group.

Complying pensions is an umbrella term for a suite of products such as Lifetime Income Streams, Life Expectancy Income Streams and Term Allocated Pensions (now called Market Linked Pensions).

As Denham puts it in a recent note: “Unfortunately many years later, things look a little different for this group. They are elderly now, and their other assets have dwindled to the point that they are on the full age pension. Their complying income stream balances have dropped to under $50,000, some to under $10,000 through no fault of their own – that is what these products are designed to do. For many, this is the last of their investments – they could sure use the cash.”

But the thing is that SMSF annual fees are now on average close to $3500 for any fund. As a result, a complying pension product which after many years of drawdowns might have, say, $35,000 left in assets would face fees each year representing around 10 per cent of the total fund.

Worse still, the high fees are eating into the pension funds at an accelerated rate.

Liam Shorte, director at Verante Financial Planning, says older investors caught in this situation should have an exit option.

“They have done what was required and it would be of little cost to either the industry or to the government to fix this issue and allow people to exit the funds.

“A way forward might be to introduce a ruling where if you were over a certain age, perhaps 85, then you could take out what is left as a lump sum - or where your fees were more than 0.5 per cent of the value of your fund you could exit,” he suggests.

With most of the complying pensions started in a flurry of activity in the decade to 2007, the numbers then dwindled as successive governments make the products less attractive.

It is now very difficult to get a clear picture of how many older Australians have been left trapped in the products.

Industry professionals say that virtually every practice in the country has problematic complying pensions on the books. As for those caught in this nasty fee trap only a change of legislation can solve the issue.