Account minimums: How big super punishes small balances

Buried in the fine print of your super fund there is likely to be an ‘account balance minimum’. If you don’t have enough in your account, they won’t give you a pension. Is that fair?

Account minimum rules lock low balance members out of super pensions. Picture: iStock

Major super funds are actively banning at least 50,000 less well-off Australians each year from accessing pensions by imposing an account minimum. In a typically murky practice from big super, some funds impose a minimum as high as $50,000 while others have not found it necessary to do so.

It’s one of the outstanding gaps in what is promoted as the world’s leading superannuation system and the issue is acute inside industry funds, which are non-profit and may have a substantial number of low-balance members.

Typically, the account minimums range between $10,000 and $20,000. And there is clearly discretion on the issue, with some funds declaring different minimums in practice to the numbers quoted on official documents.

In denying low-balance members access to a pension, the big funds exclude low-income Australians from the super pension system.

Generally, these low-balance members are advised to withdraw their money from the fund. It’s a move that may lead to higher tax outcomes.

“There is no operational reason why these minimum account balances exist,” says David Bell, executive director of the Conexus Institute, the retirement policy think-tank.

Banning low-balance members also means those members cannot receive a retirement bonus – the controversial practice where big funds offer investors a “reward” if they stay with funds when they transition from their working years to a pension from their super fund.

Super Consumers Australia deputy chief executive Katrina Ellis says the minimum account balance rules leave the money sitting there.

“People are being punished for not having enough,” Ellis says.

The funds differ

Some of the nation’s best-known super funds have substantial minimums.

AustralianSuper and Hesta both insist on $50,000 in your account before you can receive a pension. At new entrant Vanguard the minimum is $40,000.

Yet a recent research exercise by Ellis at the ACA examining product disclosure statements found a string of funds that did not impose minimums, including AMP Super Fund, MLC, REI Super, and Australian Food Super.

Minimum amounts range widely. Aware Super has a minimum of $20,000, REST has a minimum of $10,000.

There also appears to be considerable discretion around the minimums.

For example, with retail funds, Colonial First State has a minimum of $20,000, but Ellis was told by Colonial there is an ability to waive the rule.

At CBUS the minimum is officially $10,000, but when The Australian went through to the call centre we were told the minimum is $25,000.

Account minimums are rarely promoted by funds, and nor do they appear in any prominent fashion on the websites of the big funds, but they highlight several failures in the system.

* First, the funds do not offer the same deal to all members – another version of cross-subsidisation which is rife in the sector.

* Second, by accident or design, the super industry is concealing this practice from the wider public. Confusion is sustained since the rules are applied inconsistently across the sector and inconsistent terminology confuses members trying to understand a complex system: Inside 20 randomly chosen super funds there are 13 different names applied to account-based pensions.

* Third, the big funds allow enormous amounts of money to sit in super accounts where the member is old enough to receive a pension but not rich enough to be offered the service.

A report into the practice by The Conexus Institute last year suggests some funds might do more to provide their low-balance members with access to an account-based pension.

“The benefits would not only be financial, but also include more effective member engagement, and, ultimately a fairer system,” the report says.

The report indicates that up to one million Australians would fall into the grey area between retiring with money in super but not enough for a super pension stream.

Super funds justify the account minimums on the basis that it is not cost-effective to run small super income streams. They also express concern that the pension drawdown rules make pensions with very low balances problematic.

“No Australian should be denied access to a tax-free pension if they want one,” Ellis says.

“The funds should not be pricing on the basis of what’s best for them.”