What Types of Insurance Can Be Held in Self Managed Superannuation Funds

Self Managed Superannuation Fund (SMSF) Trustees’ are required to consider whether to hold insurance cover for members of the fund and to document their considerations in the fund’s investment strategy.

The Trustee will determine whether insurance is appropriate by assessing each member’s needs in terms of age, income, health and dependants.

Rules came into effect on 1 July 2014 which aimed to ensure that where members hold insurance policies within super, they are able to access the insurance proceeds from their fund in the event of a claim. Therefore, the terms and conditions of the insurance policy must align with one of the following conditions of release:

• death (including a terminal medical condition),
• permanent incapacity, or
• temporary incapacity.

Trustees can consider multiple forms of Life Insurance, including Life Cover, Total and Permanent Disability insurance, and Income Protection.

Life Cover

Life insurance provides a lump sum to dependants in the event of death or diagnosis of a terminal illness. It can help increase the funds available to cover for loss of earnings and ongoing financial commitments.

The premiums are tax deductible to the SMSF, but not to an individual.

Please be aware that when proceeds from life insurance is paid from a super fund to non dependants, an untaxed element i.e 30% tax, is applicable in some circumstances where premiums are claimed as a tax deduction.  If no deduction is claimed there is no untaxed element. The closer the deceased is to retirement the smaller the untaxed element.

Should you require further information on the definition of a non dependant, please contact our office.

Life insurance is available on its own or commonly, along with Total and Permanent Disability (TPD) insurance.

Total and Permanent Disability (TPD) insurance

Permanent Disability Insurance provides a lump sum if the insured person suffers Total and Permanent Incapacity.

Permanent incapacity, under Super Legislation conditions of release, means ill health (whether physical or mental), where the trustee is reasonably satisfied that the member is unlikely, because of the ill heath, to engage in gainful employment for which the member is reasonably qualified by education, training or experience.

An insurer generally defines total and permanent disability as:

• Any occupation – circumstances which leave a person unable to engage in gainful employment in any occupation for which the member is reasonably qualified by education, training or experience, or
• Own occupation – circumstances which leave a person unable to work again in their own occupation they held just prior to TPD.

Under Super Legislation the definition of permanent incapacity is for ‘any occupation’.

From 1 July 2014, super funds are generally prohibited from taking out ‘own occupation’ TPD policies on behalf of their members as a benefit may become payable under the policy, despite the fact that the member may still be able to engage in some other employment for which they were qualified by education, training or experience, and therefore would not qualify to have the payment released from superannuation.

‘Any-occupation’ TPD policy premiums are generally fully deductible to the SMSF.

For ‘own-occupation’ TPD policy premiums, the proportion of premium used to fund ‘any occupation’ component is generally deductible to the SMSF with the remainder not deductible.

Total and Permanent Disability Insurance can be Linked with Life Insurance or it can be a Standalone Policy.

Income protection insurance

Income protection insurance generally pays an income stream for the purpose of continuing (in whole or part) the gain or reward which the member was receiving immediately before the temporary incapacity.

From 1 July 2014 only ‘standard’ Income Protection insurance policies are able to be purchased by SMSFs and these must comply with the conditions for temporary disability payments under Super Legislation.

While policies purchased by a SMSF will generally provide cover where a member is unable to work at all due to sickness or injury, they will not be able to offer some of the additional features and benefits which policies held outside of super can, such as redundancy benefits and nursing and housekeeper care.

Also, income protection policies offered within SMSFs requires the member to be gainfully employed (including self-employed) at the time of suffering the incapacity.

Income protection premiums are generally deductible to the SMSF provided that the benefits payable under the terms of the insurance policy comply with the requirements of Super Legislation.

There is no tax advantage to holding income protection in an SMSF, as premiums are tax deductible both inside and outside of super.  The benefit of a tax deduction is limited to 15% inside super, whereas it can be up to 45% outside of super.

Trauma insurance

Trauma insurance policies within the SMSFs are generally prohibited from 1 July 2014 as their terms and conditions do not align with one of the specified conditions of release under Super Legislation.

Prior to 1 July 2014

Prior to 1 July 2014, members of complying super funds were generally able to take out a range of life and disability insurance policies issued by a life insurance company within their fund.

The only requirement was that a trustee needed to ensure the acquisition of the policy would not cause the fund to breach the acquisition from related party rules and would be permitted under the sole purpose test and the fund’s governing rules.

Deciding whether to have insurance inside an SMSF will depend on a member’s individual circumstances and needs.

Please contact our Superannuation Manager Helen Cooper on 08 9316 7000 should you wish to discuss your specific circumstances in more detail.

Any information provided in this article is general in nature and does not take into account your personal objectives, situation or needs. The information is objectively ascertainable and was not intended to imply any recommendation or opinion about a financial product. This does not constitute financial produce advice under the Corporations Act 2001.

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Increasing exempt current pension income percentage in your Self Managed Super Fund (SMSF)

Exempt current pension income (ECPI) is the amount of income that is exempt from taxation inside an SMSF.  An SMSF has exempt income if the SMSF has a pension or pensions that comply with the minimum pension standards each year. A fund can be 100% tax free if all members are in pension phase and the minimum pension/s for each member were withdrawn for the financial year that ECPI applies.

The tax exemption applies to all income (including capital gains) that is generated from the fund assets held to support retirement phase income streams. ECPI does not apply to non-arm’s length income a fund may receive or any concessional contributions.

For example, the Happy Days Superannuation Fund has two members both in pension phase in the 2018 financial year, no member has any accumulation balances and each member withdrew at least their minimum pension amount prior to 30 June 2018.  The fund did not receive any non-arm’s length income so all income received on the fund’s assets throughout the year would be 100% tax free.

Importantly if at any time the pensions for which the ECPI has been granted do not comply with pension standards (by withdrawing the minimum pension amount required), the SMSF will lose its exempt current pension income which may apply to the full financial year.

It is important to remember that if an SMSF has an ECPI amount, that only the taxable percentage of expenses can be used to claim a tax deduction.  For example, a SMSF has an actuarial percentage of 90%, the taxable proportion of the SMSF’s income is 10% and therefore only 10% of expenses can be deducted from the SMSF’s remaining income.  If the SMSF is 100% tax free, no expenses can be claimed because there is no income for the expenses to be deducted from.  Expenses cannot be banked or saved like capital losses.   So in 100% pension phase expenses cannot reduce taxable income.

When an SMSF has both pension accounts and accumulation accounts running at the same time, an Actuarial Certificate is required to confirm the correct tax free percentage of the SMSF’s income.

The Actuarial Certificate will take into account the timing and amount of every contribution, pension payment and any member transfer.

A higher actuarial percentage will result in higher ECPI and less tax to pay.

The timing of contributions and pension payments throughout the year can have an effect on the level of exempt current pension income (ECPI) an SMSF can claim in a particular year.

For those that are eligible to make concessional or non-concessional contributions into super post retirement, the ECPI percentage is reduced the longer the period of time that contributions are held in a member’s accumulation account.

The actuary requires details on when members benefits are paid, whether they are pension payments or lump sums and whether these are paid from a member’s pension account or a member’s accumulation account.

For example: A SMSF with a sole member aged 63 years of age who has met a condition of release, has $1.6 million in pension phase and $400,000 in accumulation phase.  The member is seeking to draw an annual income stream of $80,000 while the net earnings of the funds was 6 per cent per year. Note that the minimum pension requirements for someone aged under 65 years of age with $1.6m in pension is $64,000 ($1.6m x 4%)

If the member drew down his / her $80,000 income stream monthly by exhausting the minimum pension payment requirement first and then sourcing the rest of the payments from his / her accumulation account as lump sums, an estimated ECPI of 74.65 per cent would apply.

If however monthly income payments above the required 4 per cent minimum pension payments were made by lump sums from the accumulation account first, with the remaining payments subsequently made from the pension account, the ECPI increases to approximately 80.32 per cent because more money is retained in the pension account for a longer period and the accumulation account is reduced sooner.

If you are seeking to draw out more than the minimum pension required for a financial year, you need to have met a condition of release and ensure the funds deed and ATO compliance documentation is in place. Please speak to our Superannuation Manager Helen Cooper for more information.

Any information provided in this article is general in nature and does not take into account your personal objectives, situation or needs. The information is objectively ascertainable and was not intended to imply any recommendation or opinion about a financial product. This does not constitute financial produce advice under the Corporations Act 2001.

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