Q. I am constantly told the best insurance deal is when you are in a big super fund. Can I start an SMSF and leave my super in my big super fund – having two funds?
A. Commencing a Self-Managed Superannuation Fund (SMSF) may allow you greater control and access to investment opportunities which are not available within your current fund. Before opening a SMSF, stress test your reasons by seeking advice. For example, if you are seeking to trade direct Australian shares, this may be available within your existing super fund without the need to open a SMSF.
Taking on the role as trustee of your SMSF can be complicated and making a mistake can be costly with penalties and fines applying, if you breach your role as trustee and the superannuation rules. Before taking on the challenge, we suggest you complete a free online SMSF education course understanding of the obligations of an SMSF trustee. The available courses can be found via the Australian Tax Office at www.ato.gov.au.
Large superannuation funds (such as employer or industry funds) typically offer default or automatic insurance cover without the need to disclose personal health information and undergoing medical examinations. In some cases, this proves valuable to members who may be unable to secure cover due to an existing health condition such as diabetes, heart condition etc.
Opening a SMSF and retaining your insurance within an existing fund may provide greater flexibility. However, you will pay duplicate administration fees for the privilege. Please consider the costs, as this will have an impact on your final retirement savings.
You will need to ensure a sufficient balance is retained in your existing superannuation account to cover the insurance premiums. Making an additional personal contribution or a roll over into the fund could be considered. However, if the fund balance doesn’t cover the insurance premiums, the cover could lapse.
How you own your insurance cover is important but it is really important that you review how much insurance cover you have in place to ensure the cover reflects your needs; that you are not paying for too much cover but conversely that you have sufficient and appropriate cover in place.
If you feel you have sufficient insurance, “stress test” your analysis. Work through the scenarios on a “what if basis”. Ensure that the insurance you have covers the correct insurable events with the right amount of cover. Consider the impact of unexpected medical care or rehabilitation costs. Make sure you take into consideration your short and long-term Financial Planning needs. For example, would your retirement funding goals be met if you couldn’t work?
Whether or not you have the appropriate insurance in place depends upon your situation and the terms of the cover within your existing fund. Like other types of insurance, not all insurance policies offer the same features.The cheapest cover may not suit your needs and the cost may be dictated by your occupation, employment status (ie self-employed or an employee).
Be clear about why you are looking to establish a SMSF. Take into consideration the applicable establishment and ongoing costs. Review your existing levels and type of cover you have in place. Compare this to alternatives and options in the market that could be structured under an SMSF.
A qualified financial adviser can assist and also take into account other key areas such as non-superannuation options, taxation treatment of benefits, temporary or permanent disablement, estate planning and long-term retirement planning.