‘Set pensioners free’ from costly legacy pensions, government urged
With a number of elderly pensioners trapped in SMSFs with costly legacy pension products, the government should consider reforms to allow these retirees to release the small amounts they have left, says Heffron Consulting.
In an online article, Heffron senior SMSF specialist Alex Denham explained that, in the early 2000s, complying income streams were an appealing option because they enabled individuals to access a higher level of superannuation benefits over their lifetime before it was taxed excessive under reasonable benefit limits.
“They were also eligible for either a 50 per cent or 100 per cent exemption from the social security assets test and were generously income-tested, making them very appealing to those with some savings but definitely less wealthy,” she said.
In order 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 life with very limited access to lump sums.
“Once in, the individual generally cannot pull out of them, with some exceptions such as death,” she noted.
Then, in 2007, the tax and security rules changed, effectively negating the benefits of commencing any new complying income streams, she said.
Many of the retirees that set these complying pensions up are now elderly, Ms Denham said, and the balances of these income streams in some cases have dropped below $50,000 or even $10,000, which is what these products were designed to do.
For those holding complying pensions through their SMSF, this is particularly problematic, she said.
“Usually, when SMSF members are getting older and their account balances have reduced down to a level that the fund is no longer cost-effective, they have the option to wind it up by paying the remaining balances out to themselves as a tax-free lump sum,” she said.
“The trouble with complying income streams is that one of the rules that makes them complying is that they cannot be withdrawn unless it’s to roll them over to recommence a new complying pension.”
With very few retail complying income stream providers left in the market, and those that do remain requiring a minimum amount that can be rolled into them, it is often impossible to roll the amount over, Ms Denham said.
Consequently, there is now a group of pensioners with the last of their savings stuck in legacy products in SMSFs being eaten away by administration fees at an alarming rate.
“A fund with, say, $20,000 in assets can still cost around $3,000 a year to run especially if it has a complying pension in it,” she noted.
“For many, it’s starting to bite. I have seen many cases where an elderly widow is on the full age pension with almost nothing left except less than $50,000 in their SMSF, inaccessible and being run down by up to an effective 5–10 per cent in fees each year.”
Ms Denham said this is an area requiring reform from the government.
“It’s time to let these amounts out. No one benefits from these people staying locked in — be it an SMSF or a retail provider,” she stressed.
“Not the government, nor the member, whose assets are too low to be getting any tax or social security advantage from them. Not the retail product provider — these legacy products are a costly headache and they would happily shut them down. Even the SMSF service providers would be happy to see them go.”
The government could consider a legislative amendment that allows the release of these pensions when the balance gets below a certain point, she suggested, such as $100,000 or even $20,000.
“It would cost the government nothing and frees up the cash for these elderly members to use towards their medical and aged care costs,” she stated.
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates. Miranda has also directed SMSF Adviser's print publication for several years.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.