Super funds storm coming

Check your life insurance and will when the government introduces its rule changes, writes Anthony Keane

HOLDING life insurance in a superannuation fund is about to get trickier.

It’s still a great way to protect a family’s finances without having to pay premiums from household budgets, but rule changes to superannuation coming in July will move the goalposts significantly.

While the Federal Government’s new $1.6 million cap on super pension balances seems higher than most Aussies will ever save for their retirement, the addition of a life insurance payout can dramatically change things.

Pilot Partners director of taxation Murray Howlett said many Australians were “tuning out” of talk about the super changes, believing they would not be affected.

However, plenty of people in their 40s and 50s take out large life insurance policies in super to cover the costs of raising children, and if they die, the caps could come into play.

“The rules have changed. If you thought this did not apply to you because you don’t have $1.6 million in super, make sure the impact of those rules does not mean you don’t have as much as you thought you had,” Mr Howlett said.

“Your insurance may need to be reviewed and your will may need to be reviewed.” Retirees also need to consider the effect of the caps on potential insurance payouts, or what happens if one partner dies and two individual caps become one. In a paper presented at this month’s SMSF Association national conference, Cooper Grace Ward partner Scott Hay-Bartlem said the new rules were a “fairly fundamental shift” in retirement planning. “They require some substantial changes to estate planning where there are funds in superannuation,” he said.

“Dealing with death benefits in the correct way will be increasingly important, given the extra limitations on getting funds into superannuation that apply from July 1. If the benefit leaves the superannuation system because of a member’s death, it will be more difficult to get the funds back in.”

Superannuation does not form part of a person’s estate when they die and is not dealt with by a will. The super fund trustee generally decides who gets the money, within guidelines, unless the member makes a binding nomination.

Despite the complexity, it remains a popular place for people to hold life insurance because premiums can be funded by a person’s compulsory employer super contributions and it enables money to be left to dependants in a tax-free pension.

As Australians’ super balances grow, funds are becoming a juicy target in family fights over estates.

Mr Hay-Bartlem said there had been an increase in legal battles over super death benefits in the last few years.

“It is essential to consider both estate planning and superannuation when developing a strategy,” he said.