Determining whether an SMSF client should continue to hold insurance inside a super fund is a complicated decision that poses a number of traps for SMSF practitioners, says Colonial First State.
Colonial First state executive manager Craig Day says following some of the super reforms, SMSF practitioners will need to reassess whether it remains viable for their clients to keep insurance policies inside their super fund.
For clients who are going to struggle to meet their retirement target under the reduced contribution levels, it may be better to hold insurance outside of superannuation, because the premiums will further reduce their concessional cap, Mr Day said.
“If you’re putting in $3,000 to fund those insurance premiums, then the net concessional contribution going towards your retirement will only be $22,000.
Other clients, on the other hand, might have strains on their cash flow such as a mortgage and dependants, and may not be able to afford the premiums outside of super.
“It may be better for me to go and locate that insurance outside super from a retirement funding perspective, but can I afford the $5,000 worth of premiums every year or whatever the premium level is,” Mr Day said.
He said SMSF practitioners will also have to consider what the treatment of the insurance proceeds will be if the policy is held outside of super if an event ever does occur.
“I might get a $1 million worth of insurance proceeds, and where’s the best place for those? Well, potentially it may be back inside super because then I can use those proceeds to commence an account-based pension if I’m totally and permanently disabled,” he explained.
“Now, in that situation, the income from my pension payments will be included in my assessable income, but I’ll get a 15 per cent rebate or offset on them.”
However, if the insurance policy is held outside of super, the new non-concessional caps will make it harder to get it back in, Mr Day warned.
SMSF practitioners will also need to consider whether the client’s insurance policy can be transferred out of their super fund and what the client’s health circumstances are currently.
The client may not be able to get the same level of insurance or obtain an insurance at all based on their health situation or background, he said.
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