The ‘Protecting Your Superannuation’ package, proposed in the 2018 Federal Budget, was passed earlier this year, and while the changes were designed to protect small superannuation balances, there may be significant implications for others. Many SMSF members, or others with large super balances, maintain smaller public offer accounts solely to access well-priced group life insurance. This legislation may place those life policies at risk unless members take action.
Super changes already legislated
The key changes in this legislation take effect from 1 July 2019, and are designed to limit the erosion of small balances in the following ways:
- Fees will be limited to no more than 3% per annum for accounts with a balance of less than $6,000.
- Exit fees on all super accounts will be banned to remove barriers to consolidation.
- Insurance will be maintained on an opt-in basis for inactive accounts, defined as those that have not received a contribution in 16 months. Funds will be required to contact inactive members before 1 May 2019 to confirm whether they wish to maintain their existing cover.
- Super trustees will also be required to transfer all inactive accounts with balances below $6,000 to the ATO, which will then strive to transfer these balances to the owner’s active superannuation account.
(Please note: The proposal to make insurance an ‘opt-in’ for those commencing a superannuation account under the age of 25, or with a balance of less than $6,000, was dropped from this legislation and will be proposed in a separate bill, which has not yet passed).
If you have been maintaining a small inactive superannuation fund for insurance purposes, it is likely this legislation will affect you. You may have your insurance policy cancelled, or, if your balance is below $6,000, your policy cancelled AND your balance transferred to the ATO. Neither of these outcomes is desirable if you are intentionally arranging insurance cover in an account separate from your existing active super balance.
Benefits of insurance through a large fund
If you have an inactive account, your superannuation fund should contact you soon requesting that you opt in to maintain your insurance cover. However you will need to ensure they have the correct mailing details etc in order to contact you. If you have not heard from your fund by 1 May, it is strongly advised that you contact them directly to confirm that you wish to maintain your cover, if you wish to do so.
The implications of having insurance cancelled can be significant. It is widely accepted that thousands of small superannuation accounts are maintained in the public system by SMSF trustees purely for insurance purposes.
Superannuation funds can hold life, total and permanent disablement and income protection policies on your behalf. Large funds are also generally able to access group policies that offer lower premiums than personal policies such as those you can access through an SMSF. Large super funds also often offer ‘automatic acceptance limits’, which allow you take out cover up to pre-specified limits without having to undergo personal underwriting, which may include medical tests and so on.
In the event your existing cover is cancelled, you may not be able to get new cover on the same terms. You may need to disclose medical conditions that have arisen since you originally applied, and have higher premiums or exclusions as a result, or you may no longer be eligible for cover at all through that fund. In many circumstances, particularly if you are older, or have poor health or a high-risk occupation, your existing policy may be the only insurance policy you hold. It may also be the only affordable insurance you are able to get.
Qualifying a fund as active
Insurance is critical if you have debt, dependents or rely on your income for your financial security. If that insurance is held in a super fund you’re not contributing to, you will need to consider whether to make the fund active, or at least ensure that the trustee of the fund knows you want it by opting in. Part of the new legislation lists actions that qualify a fund as active, which include making contributions, rolling funds into the account, changing investment options, making changes to your insurance or making a declaration to the ATO. If you’re not sure what you have, exactly, this could also present a great opportunity to review your insurance and ensure you have the cover you need.
Gemma Dale is Director of SMSF and Investor Behaviour at nabtrade, a sponsor of Cuffelinks. Any information in this publication is of a general nature only. It is not intended to be a substitute for specialised advice and nabtrade is not a registered tax agent.
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