The chief executive of one of Australia's largest superannuation funds has come out against those in the financial services industry who say retiree fund members with small account balances should cash out their super.
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Debby Blakey, the new chief executive of the 800,000 member HESTA industry fund, which covers the health and community services sectors, is concerned by the "promotion of this sort of opinion".
Some planners are recommending that retirees cash out their small balances because of a rise in the tax-free threshold that removes the tax advantage of keeping small amounts inside super.
It is an issue affecting many retirees - particularly women - who are retiring with lump sums of $120,000 or less.
Anyone who has reached age 60 and is retired pays no tax on a pension income stream, such as an allocated pension, or on the earnings within the fund from which the income is drawn
What triggered the advice from some planners was an increase in the basic tax-free threshold from $6000 in 2011-12 to $18,200 in 2012-13.
Retirees are allowed to earn more than the basic tax-free threshold by virtue of the Seniors and Pensioners Tax Offset.
Financial planner and Money columnist, Noel Whittaker, for instance, has said that as there are no tax savings for people with low balances in super and small amounts of financial assets outside it, moving it outside super protects you from future super rule changes and also from the ongoing fees that super funds charge.
More than 80 per cent of HESTA's members are women. Many have modest incomes and super balances. Blakey says women can harness these resources – combined with the age pension – to continue their lifestyle in retirement using the income their balance generates and not the lump sum itself.
"We also believe the idea that these women should simply remove their super and invest it elsewhere for a markedly better result is not grounded in reality," she says. "And the peace-of-mind benefit of setting up an income stream from superannuation to generate a long-term income to supplement the age pension can be considerable."
Phillip Gillard, a financial planner at Shadforth Financial Group, says he is concerned that retirees who withdraw money from their super could simply put it into investments they know, such as term deposits. Most term deposits are paying less than 3 per cent and banks' transactions accounts pay barely anything at all. He says large super funds have very experienced investment committees who decide where to invest members' money.
Retirees are very likely to have their money invested in a well-diversified investment option – one that spreads the money between different types of investments, Gillard says.
Large funds, such as industry funds, typically have annual fees of about 1 per cent of the account balance for their well-diversified investment options and much less for their cash options.
Laura Menschik, a financial planner and director of WLM Financial Services, says many retirees may not have a financial adviser. Many may not even know that they are able to cash out their super. However, she says having an income stream from an allocated pension helps retirees with budgeting.
Super funds provide their retiree members with the numbers twice a year that they simply pass on to Centrelink for calculation of the age pension.
Menschik says, depending on individual circumstances, there can be a case for cashing out very small balances. That may be where the fund charges a fixed fee in addition to a fee that is a percentage of the account balance.
Whittaker says fees of many super funds are "at least 1 per cent a year". He says managed funds can be held outside of super to get the diversification. He suspects super finds may be trying to hold on to money and continue to receive asset-based fees.
