Superannuation Q&A

This week’s questions cover:

• Is my SMSF the best place to have my life insurances?
• I’m 65. Can I get income protection insurance?
• I’ve got a state pension and an accumulation fund. Should I move some super into my personal name?
• My husband is 60 this year. Can we access super to help the kids buy a home?

Insurance through the SMSF

Further to last week’s article on insurance, can I, as a PAYE with my own SMSF, run my life, TPD and income protection insurance through my SMSF? What benefits are there? What downside, if any?

Absolutely. If your SMSF is your only fund and you have a need for insurance – which most people do – then it is probably where you should have those three types of cover. There is really only one potential exception to that, which I’ll explain below.

When it comes to life and TPD insurance, inside a super fund (it doesn’t matter whether it’s DIY or not) is where a tax deduction can be claimed. A deduction cannot be claimed in your personal name. So in most instances, inside super is where it will make the most sense, including in a SMSF.

And particularly for those who have the ability to salary sacrifice (last week’s column has been updated to discuss salary sacrificing), taking out income protection inside super can also make sense. Salary sacrificing enough to cover the premiums into super can be worthwhile.

One downside might be cost. Bigger funds (industry, corporate or retail) tend to organise cheaper group life cover for their members. An individual (or SMSF) requesting cover won’t get access to group insurance rates.

The only reason you might have your life and TPD insurance in another fund that you’ve got is that with industry, corporate and even retail funds, you might get access to group discount rates for those policies. Larger funds tend to do deals with the insurance companies to give better rates to clients.

The upside of not taking it out in a larger super fund could be that you get a better insurance policy. There are many ordinary insurance policies out there, particularly in TPD and income protection. Some pay on a much larger number of conditions or accidents and they might be the difference between receiving a payout and not. If you use an adviser – which I particularly recommend for all types of insurance – then have them justify why they have chosen that particular product for you.

Income protection at 65

I am 65 and wondering whether it is possible to obtain income protection insurance at my age? I am a single woman with a very small super account. The figure had been about $60,000, but is probably less now the sharemarket has fallen.

Most insurers I contacted on this said they had nothing available because their policies were designed to finish at age 65. It might be possible, but there is very limited product out there.

Income protection insurance has traditionally been available for periods of two or five years (from your inability to work), or to age 60 or 65.

The one insurer I did find that does offer income protection insurance for over-65s had strict limits. The waiting period had to be either 30 or 60 days (instead of up to two years), it was renewable yearly (instead of guaranteed renewable), was available for only 13 potential incidents and was only available for highly rated professions.

Income protection insurance is designed to help you earn an income until the time that you would have retired, and because the retirement age in Australia is 65, insurers only offer insurance that covers you to that age.

Time to switch strategies?

I have recently retired on a state super pension. I have another accumulation account. Given the continuing negative returns for most investment strategies in that fund’s options, I have been planning to invest in the “Cash Option”, draw down the minimum 4% and assume higher growth. Alternatively, my accountant suggested that we invest 50% outside super in a credit union account earning 8%. The argument is that because of our situation and age, no tax would be payable. Is the advantage of staying in the super environment the option to change investment strategies when “the time is right”, or are there other reasons to remain in super?

You can change your investment strategy whenever you want, whether your money is inside or outside super. If your money is outside super, you can change from cash to shares (direct or managed fund) just as easily as you can within super. But one of the many advantages of having it in super would be the access to low-fee managed funds (in most cases, but you should do check with the accumulation fund you’re in).

The negative returns of “most investment options” will be largely based on what’s been happening in equities markets since November and what’s been happening in commercial property markets for about the past year. These cycles will turn, if they haven’t already. If you are in cash, you have a nice, safe return, with little fluctuation. And if you’ve been in cash for the past six to 12 months, then you will have done brilliantly, compared to options in growth investments.

Have the markets turned? I don’t know for sure. Your Eureka Report experts with more gumption than me are calling it. Alan Kohler is cautiously reinvesting; Charlie Aitken has called the bottom; Rudi Filapek-Vandyck appears less sure, but seems to think the worst is over. For what it’s worth, my heart says Charlie, my head says Rudi and my wallet, as far as it pertains to super, says Alan (go forth, but cautiously).

Superannuation matters from a tax perspective. The income that you earn from super (for the over-60s, who are retired and in pension phase) does not count towards a taxable income. However, your state super pension, may have some assessable income as part of it. Therefore, if you add more non-super income to already assessable income, you might have to pay some tax.

You will need to sit down with your accountant and/or adviser to crunch some actual numbers on this issue.

House help

My husband turns 60 in September. Are we able to take a lump sum from our DIY super to assist our daughter buy a house – keeping in mind we have enough to live on for a long time. Are their limits and does tax apply?

Yes, but there are a few things to think about. After your husband turns 60, retires and turns his super to pension phase, he can take out as much of his money as he likes, tax-free.

If he’s not going to retire, then he could shift to a transition to retirement pension (which he probably should be on already anyway). If he took a transition to retirement pension (TRIP), he would be restricted to taking 4–10% each year until he is 65.

As has been covered many times by Trish Power (and myself) in this space, anyone over the age of 55 should look to take advantage of a TRIP anyway.

Bruce Brammall is a senior financial adviser with Stantins Financial Services.

We can provide general investment advice only. If you’re seeking specific financial advice on your particular circumstances, then you’ll need to make an appointment with a licensed financial adviser.

Do you have a question for Bruce Brammall? Send an email to supersecrets@eurekareport.com.au