Don't always listen to the ATO

Sometimes the “advice” you get from the Australian Tax Office (ATO) is the worst advice you will ever receive.

So bad, in fact, that it should be banned. I repeat, the ATO should be banned from providing certain types of “advice”. Why? Because of their trusted/feared position in society, their “suggestions” are more likely to be followed.

If the ATO tells you to do something… you're more likely to do it, aren't you, than when a colleague tells you to do something, or you read something online?

But you shouldn't always do what the ATO says, necessarily.

A recent ATO suggestion nearly tragically cost my clients $900,000. Had it not been for some swift work to undo everything the ATO had just done, our clients would have been financially devastated.

“What did the ATO do?!” I hear you ask.

Well, they sent out a “consolidation” letter. That letter stated, essentially, that the ATO had discovered (through tax file number data matching) that the client had two super funds, Fund 1 and Fund 2.

Fund 2 hadn't received contributions for several years, said the ATO. So, if they signed the enclosed form, the ATO would organise the rollover of Fund 2 to Fund 1.

Except Fund 2 had around $900,000 of life and total and permanent disability insurance in it. Unfortunately, the client signed. The money was rolled over from Fund 2 to Fund 1. The insurance was cancelled.

Thankfully, damage wasn't so far gone that it couldn't be undone. And undone it was.

This month, my client died. Aged 50. Married. With two teenage daughters. From secondary cancers, where the primary cancer had occurred a year or more before the ATO's letter arrived.

As a result of those earlier cancers, had the insurance in Fund 2 been irrevocably cancelled, she was never, ever, going to be able to get new insurance.

Had the ATO's process not been reversible and reversed quickly, her husband and daughters would have been out of pocket $900,000.

Super's strained relationship with service

Okay, honestly, I'm not really having a crack at the ATO. They are just one service provider that does this. The ATO and pretty much every super fund provider sends out these consolidation letters to their members, making offers to consolidate or data matching to “help” clients.

In my opinion, they should all be immediately banned from doing so. Or at least forced to paint, IN BIG RED WRITING, that people should be very wary of signing super consolidation documents without doing thorough investigations themselves, or getting financial advisors to do it on their behalf, specifically into their insurance situation.

The fund sending the letter has absolutely no idea what insurances you might have at these other funds which they are recommending you close. They have no idea whether you have existing health conditions that might stop you being able to get new insurances, once cancelled.

And they don't even really seem to care if you have received adequate insurance advice with them in the first place.

The base problem is that super funds are primarily interested in, quite simply, managing money. They earn their fees from the volume of funds they manage, and this includes industry super funds.

They're not really interested in insurance. Insurance is usually, at best, an afterthought for them.

If they can send you a consolidation letter than might cost them $5 to send, that leads them to gain rolled over funds of just $15,000, they will earn an extra $105 a year ($15,000 x 0.7 per cent).

If they can hook just a few clients, it's profitable business for them.

Don't move a dollar before…

No one should ever move a dollar of superannuation from one fund to another without considering insurance.

It should actually be the first thing you think about.

This message is probably most poignant to those of you starting to do research into managing your own superannuation, possibly even starting your own self-managed super fund. Don't consolidate superannuation without thoroughly checking the insurances at every single fund you are considering closing or depleting.

First, do a full stocktake of every piece of insurance you have in every fund you are considering consolidating or moving. Be aware, exactly, of which funds have what insurance.

Second, consider your own health. If you have suffered from some health issues in recent years, since you were last underwritten, understand these might lead to penalties (known as “loadings” and “exclusions”) on any new insurances you take out.

If you are wanting to move your super, consider your options.

1. Consider applying for insurance with your “to” fund before you do anything in the way of moving any superannuation money. If you can get suitable insurance at the new fund, great. Then consider moving your superannuation to that fund.
2. If you want to move your super funds to another APRA-regulated fund, or to an SMSF, consider leaving some other funds with the other providers to keep those existing insurances in place.
3. See if your insurance can be transferred to your new provider or SMSF. It can be a long and involved process, but better than having to reapply for insurance, particularly if your health has changed.
4. Check the cost of getting new insurances at your new APRA fund, or a retail quote within your SMSF.

Sure, insurance is a grudge purchase. Nobody enjoys paying premiums. But they're not worthless, particularly when it comes to policies being in-force and non-cancellable.

Simply rolling over, or consolidating, superannuation for the sake of saving a few hundred dollars in fees (as would have been the benefit to my client) could, literally, cost you hundreds of thousands, even beyond a million, in the worst of circumstances.