Amid the inquiries into financial services reform, concessions and how people should access and pay for advice have emerged as the key issues in relation to superannuation.
We are all aware that the financial services industry is under intense scrutiny from numerous government and industry reviews.
Throughout these reviews, two central issues have become apparent regarding superannuation. They are:
- What concessions should be given to the ordinary person to have money in superannuation?
- How should people obtain advice, how should they pay and how much should they pay?
One aspect of the first issue is the role of insurances in superannuation and the extent to which the cost of insurance diverts the tax concessions for super from its primary purpose.
In the detail of the public documents of the Harmer Review and the interim Henry Report released to date, the issue of insurance cover ‘embedded’ in superannuation has been raised for close scrutiny.
In terms Australian Prudential Regulation Authority (APRA) has used previously, at what level does the cost of cover becomes an unreasonable diversion of contributions in terms of the target of tax concessions for the provision for retirement?
Acknowledging the constraints of a 9 per cent superannuation contributions guarantee (SGC) rate and the halving of the concessional contribution cap, the cost of insurance premiums becomes significant in the debate.
The removal of the reasonable benefits limits has seen high levels of insurance cover placed into individuals’ superannuation as an unintended consequence.
This alone could cause regulators to consider the fee relationships between product providers, financial advisers and licensees.
The last thing a professional financial adviser wants to see is a mandated ‘one size fits all’ group life solution as the only option for their clients for cover in super, instead of uniquely tailored solutions.
It would be naïve to think that policymakers will not reflect on these issues and, even more naïve, to presume there will not be major change.
The challenge for the industry is to ensure the baby is not thrown out with the bathwater. The valuable elements of adequate total and permanent disablement (TPD), income protection, death and even trauma cover in super still need to be available.
We still need to be able to provide tailored solutions in superannuation, but perhaps it will be in an environment that encourages a much stronger enforcement of the core purpose of the Sole Purpose test (s 62(1)(a) Superannuation Industry (Supervision) Act 1993) by constraining the use of the ancillary purpose, naturally leading to product innovation.
This may not be a challenge for many professional risk advisers, as the two keystones for advice should be:
- Understanding the purpose of the cover; and
- Maximising the certainty of getting the right money to the right person at the right time.
For some, a purchasing decision based solely on price is the only choice. Pragmatically, any cover is better than none.
The new regulatory environment that could emerge might challenge advisers seeking to provide unique, high-value funding solutions using superannuation’s tax-effective concessions.
Some examples follow below.
Why place more in superannuation than is necessary for the immediate and direct financial security of superannuation dependants?
If it is likely that a client’s personal circumstances are complex, and will change in the future, why place cover for other purposes in a vehicle prone to claim staking and benefit tax?
Total and permanent disability cover
Why fund the excess cost of own-occupation TPD cover in a super environment? Can the premium cost be better split between any-occupation and own-occupation in and outside of super?
Why have long-term temporary disability benefits in super, at all?
An eligible person can claim a tax deduction for premiums outside of superannuation, and an employed person may use pre-tax dollars packaged through the ‘otherwise deductible rule’.
If a trustee offers an ‘off-the-shelf’ income-protection product containing ancillary benefits, features that are not permitted in superannuation such as rehabilitation or accidental injury benefits, why should the member pay for them?
Trauma cover, although popular, is cost-prohibitive for older clients, hence the attraction to placing it in super, drawing on established funding, most often through a SMSF.
Though we may construct a substantive argument for compliance with the sole purpose test, there are still the hurdles of meeting a condition of release and the ongoing defence against the unreasonable diversion of contributions to consider.
The Government may end up limiting the application of contributions to concessional tax superannuation funds for what it deems as “excessive life insurance premiums”.
Recommendations, of one or another review, may state that life insurance premiums should not be paid from benefits arising from superannuation guarantee contributions or they may cap the premium cost by an age-based percentage.
Alternatively, they may state you can have any cover you like as long as it is funded by non-concessional contributions.
Whatever the outcome of the current plethora of reviews, financial advisers will continue to need to be flexible, and perhaps include extra considerations when making a superannuation-based insurance recommendation.
Considerations need to include:
- Are level premiums suitable and available?
- Does the insurer offer ‘cancellation and re-issue’ for the cover you are proposing?
- Can you split any-occupation TPD cover from own-occupation TPD cover?
Many financial advisers consider the provision of financial security for clients’ families as the fundamental priority, but current reviews may recommend this be done outside of superannuation.
Martin Breckon is technical marketing manager at Aviva Australia.