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Risk cover now poses real dilemma

SMSF advisers will now have to consider carefully how they structure their clients’ risk cover either inside the super fund or external to it, a senior technical executive has said.

The first consideration advisers need to recognise, especially for those individuals categorised as middle-aged accumulators, is the impact the lower concessional contributions cap may have on the ability of this group to fund risk insurance premiums via their SMSF, Colonial First State FirstTech executive manager Craig Day said.

“Here if you’ve got a client who is going to be cap constrained, and what I mean by that is even if they maximise their contributions to $25,000 a year, they’re not going to achieve their retirement target because they simply won’t be able to get enough into super within the period that they’ve got available to them, for those clients if they’ve got insurance inside super, do you really continue to hold it there,” Day said.

“Those premiums will be further reducing your concessional cap because they’re eating into it.”

He pointed out the situation is complex, with factors to consider including the impact on the member’s retirement, whether the cover can be transferred out of super, whether the individual can afford to pay insurance premiums outside of super knowing a tax deduction will no longer be available, and the health circumstances of the individual and whether equivalent risk cover could be arranged.

However, he noted the total super balance restrictions on the ability of a superannuant to make non-concessional contributions added an extra layer of complexity to the decision of holding risk cover outside the SMSF.

“What happens if an event occurs when I hold risk insurance outside super? Then I might get $1 million worth of insurance proceeds, but where’s the best place for those?” he said.

“Well potentially it may well be back inside super because I can use those proceeds to commence an account-based pension if I’m totally and permanently disabled.

“In that situation the income from those pension payments will be included in my assessable income, but I’ll get a 15 per cent rebate or offset on them.

“So if I actually hold the insurance outside super, these new non-concessional caps will then make it harder to get it back in.

“So it’s a damned if you do or damned if you don’t situation with insurance and there is no easy answer there for clients or advisers. You really need to look at each circumstance and figure out [what’s best].”

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