Technical expert Natasha Panagis joined AIA Australia this April to help advisers with technical training and strategy support. She reveals to Krystine Lumanta how the latest announcements could see insurance policies inadvertently cancelled and what trustees will need to do to avoid this.
How did you get your start in the SMSF sector?
I’ve been working in financial services since 2004. As part of my studies, I had learned about SMSFs from a technical and theoretical viewpoint, which I really enjoyed. I started working for a high net wealth financial planning firm in 2010 where I was responsible for providing technical and strategic advice to advisers around the more complex technical rules, strategies and practical issues that were affecting their SMSF clients. I’ve been involved in the SMSF sector ever since.
What qualifications have you attained?
I’ve completed a Bachelor of Business (Management), a Bachelor of Business (Applied Finance) and an Advanced Diploma of Financial Services (Financial Planning). I am also a certified financial planner, an SMSF specialist adviser and an SMSF specialist practitioner.
You’re technical manager at AIA Australia. What are your key responsibilities?
I joined AIA Australia in April this year. I’m really enjoying my role where I’m responsible for providing technical training and strategy support to financial advisers, as well as to our client development managers and sales support teams nationally. I spend the majority of my time speaking to advisers and answering their questions. I translate complex legislative and regulatory rules into technical strategies and marketing materials for advisers, writing articles and developing presentations on a broad range of wealth management areas, from insurance through to super, retirement and estate planning. Before AIA, I was a technical manager at Aged Care Steps and Strategy Steps and I’ve held technical roles with Centric Wealth and FuturePlus Financial Services, so I guess you can say I really enjoy working in the technical space.
What are the key technical SMSF questions you are dealing with currently?
With all the changes to super that we have been through over the recent years, the reforms still take up a large amount of our time and resources. Questions around the 2017 changes are still coming through. We’re asked everything from the intricacies of making and claiming personal deductible contributions, the transfer balance cap, death benefits and reversionary income streams to the new events-based reporting obligations that SMSF trustees needed to comply with from 1 July.
What about insurance-related queries?
We’re still fielding questions around the 2014 changes to insurance in super: the types of insurance policies that SMSF trustees can acquire on behalf of members, how insurance policies should be structured and paid for, and how to use insurance to help with liquidity issues, especially where SMSFs have lumpy and illiquid assets or a limited recourse borrowing arrangement. And there are always the usual technical SMSF questions, which include the types of assets SMSFs can acquire from related parties, such as shares and units in related private trusts and companies, and what SMSF clients should do if there has been a breach because they have used the SMSF’s funds to pay for personal expenses for a member, like paying the premiums for a personal insurance policy.
What are your thoughts on the super reforms and their impact on SMSFs overall?
I think most people will agree that the 2017 super changes were inevitable. Considering we have been in budget deficit since the global financial crisis, it was only a matter of time before the generous tax concessions to super would be targeted. The issue with the 2017 changes is that the rules have become quite complex so trustees need to get expert advice from professional advisers who specialise in super law and have profound SMSF skills and knowledge.
What effect will the additional changes to super and insurance the government announced this year have on the industry?
The protection measures will see group insurance within super move from a default framework to an opt-in basis for those members with balances of less than $6000, or under the age of 25 years – impacting only new members from 1 July 2019 – or those whose accounts have not received a contribution in 13 months and are inactive. The bill to enact these measures, Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018, was introduced into the Senate on 28 June and still requires the passage of legislation. Although these proposals do not apply to accounts in an SMSF or a small APRA (Australian Prudential Regulation Authority) fund, clients who have an SMSF but also have funds in an APRA-regulated fund for insurance purposes may lose their cover if they do not take action. When setting up an SMSF with a rollover, many clients will often leave behind a small balance in their public offer fund to retain their insurance cover for death or total and permanent disability. As most SMSF clients would redirect their employer contributions into their SMSF, no further contributions would be made to the APRA fund, which can mean the fund may be deemed ‘inactive’. This could cause a client’s insurance policy to be cancelled unless the client takes action to ensure their cover remains in place.
What will SMSFs need to do to ensure the cover is not cancelled?
SMSF clients will need to opt in to their insurance cover before 1 July 2019. Alternatively, SMSF clients may also wish to redirect employer contributions back into the APRA-regulated fund – however, this may not be appropriate based on the client’s situation – or make additional contributions into the APRA-regulated fund every so often so that the fund is not considered inactive. They could also look at obtaining insurance via their SMSF or utilising an insurance-only super policy. AIA shares the federal government’s intention to reduce the unnecessary erosion of retirement balances, however, research conducted into this issue is demonstrating that the Australian public will be financially worse off under the proposed reforms. A report by KPMG called “Insurance in Superannuation” found that the adoption of the proposed reforms for young Australians and low-balance or inactive accounts would result in a 26 per cent rise in premiums for remaining insured members. The unintended consequence of this increase in premiums would cause members to be worse off at retirement, with their balance to be eroded by a further 1.2 per cent. In 2017, AIA paid more than $75 million in claims to members with active but low-balance super accounts, and $84 million on 1200 claims for people under 25 since 2015. So I don’t think it’s as easy as saying young people don’t require cover or that they work exclusively in casual or part-time employment. More than 600,000 young workers under 25 do so on a full-time basis, which is 42 per cent of the under-25 working population. If these changes become law, we hope that this measure does not lead to a worsening claims experience or result in an overall detrimental impact to life insurance premium rates and to the already concerning underinsurance of working-age Australians.
What’s the biggest change you’ve seen in the industry?
Mainly it’s all the legislative change we have seen in the super system. Some of the positive changes include the removal of the 10 per cent test for personal deductible contributions as any eligible client can claim a tax deduction for personal super contributions, regardless of their employment status. The other positive change is the ability to roll over a death benefit pension to commence another death benefit pension in another fund. This is fantastic as it gives clients choice about which fund pays their death benefit pension. They are no longer restricted to staying with the original fund their spouse was with to pay the death benefit pension. As for the negatives, the reduction of the contribution caps is not ideal, especially where a client’s total super balance is used to determine whether they will be eligible for certain super measures, such as making non-concessional contributions, or their ability to use the segregated method within their SMSF. The other negative has to be the transfer balance cap, which limits the amount that can be used to commence a pension to $1.6 million. Although this amount may be sufficient for many clients, the limit can easily be exceeded where a client’s life insurance policy is added to their super or pension account, or a couple’s combined super balances would exceed $1.6 million on the death of the first spouse, as the surviving spouse who receives a reversionary pension may exceed the $1.6 million transfer balance cap.
What is the one thing you’d change about the SMSF industry?
SMSF investment rules are a bit restrictive. Trustees should be able to invest and acquire assets from members that they would otherwise be able to invest in on the open market. For example, why can’t an SMSF trustee acquire a residential property from a related party if it’s acquired at market rates and is rented to an unrelated third party on commercial terms?
What’s the biggest challenge in the next 12 months?
The constant proposals and changes to the rules can be difficult for providers, advisers and clients due to the uncertainty it brings. Also the lack of information and the time taken to obtain confirmation can often take months. This becomes an issue when helping clients strategise and implement their financial plan as uncertainty can change or put a client’s plans on hold for a while.