Speaking to SMSF Adviser, Sonia Cruz, a senior consultant at The Fold Legal, said she sees a lot of advice that is “very short-term focused”.
“What I mean by that is that you’ll have advisers recommend insurance within superannuation, and in some instances I’ve seen cases where the insurance premiums actually exceed the superannuation guarantee contributions that the client makes,” she said.
“What that means is the client’s superannuation balance is going backwards and there’s no long-term assessment of what the retirement implications are for this client. That’s one concern that has come up recently,” she said.
Ms Cruz also flagged some “basic” recurring issues, such as failure to consider the implications of rolling over a client’s superannuation policy from an APRA fund to an SMSF.
“When clients have insurance, if they roll over their super and the insurance is cancelled, if they’ve got pre-existing medical conditions there could be a big risk that they won’t be able to get adequate cover elsewhere, or they’d have premium loading added onto their insurance,” Ms Cruz said.
Ms Cruz fears these issues will grow after 30 June, given the restrictions accountants face under a limited licence when it comes to discussing insurance in superannuation.
Speaking previously to SMSF Adviser, solicitor at The Fold Legal Jaime Lumsden Kelly explained the “awkward” situation accountants will face when a client comes to them with pre-existing insurance within a superannuation fund.
“The accountant can’t advise on that insurance because they have no full advice authorisation in relation to insurance; all they have is a class of product authorisation, so they can only talk about life insurance in general terms and can’t advise on specific products,” she said.
“So what in practice is going to have to happen – and this is going to be a little bit awkward for the accountants – is that when they set up an SMSF and recommend a rollover, before they roll that money over, they’re going to have to send the client to a financial planner who can look at the life insurance that sits in that [fund],” she said.
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An accountant can still tell the client that insurance needs to be considered in the context of a SMSF (this information is freely available on websites)and that the client should discuss the coverage with their insurance advisor. That is all, no financial advice.
This may be an issue for currently unlicensed accountants setting up SMSFs, but not for good planners. When we establish a fund for clients who have insurance elsewhere, we always leave the minimum balance in the old super account to ensure that cover is not lost if they can’t get cover due to health, occupation or pastime issues.
As to premiums reducing overall retirement savings in super, that’s a Captain Obvious, but the same is true if they hold the policy outside of super. It will reduce their non-super retirement savings also. So are they saying that clients shouldn’t have cover? That’s just trading off one potential issue (retirement shortfall) against another potential issue (the risk of premature death or retirement due to sickness or injury).
This is not correct: paying a premium out of super assets does not reduce the net wealth available for retirement compared to paying a premium out of non-super assets.
Few clients have all their retirement wealth in super. If you pay the premium out of your super assets you reduce your super wealth. If you pay your premium out of your non-super assets you reduce your non-super wealth. But the tax benefit of paying your premium out of super means the overall effect on your long term wealth accumulation is positive ie the amount available for retirement is increased, not decreased.
Most clients retirement prospects are maximized by paying the premium out of super. Yes. It does reduce the amount available for retirement in super assets. But this reduction is less than it would be if the premium was paid out of non-super assets.
Why do lawyers feel compelled to comment and write on some of the most basic daily issues and procedures as if they themselves, being of such superior intellect were the first to see the issue.
Give us a break. The issues raised are not new nor are the ways to deal with it.