Advisers often recommend clients retaining a minimal balance, say $10,000, in an old super fund when transferring benefits to a new super fund. The purpose of retaining this minimal balance is to retain the benefits of life, TPD and risk insurance in the old fund.

For example, a client may have $400,000 with an industry fund, and be interested in setting up a self-managed super fund and borrowing $600,000 to buy an investment property (not an apartment) for say $1,000,000.

The adviser correctly identifies, and records in the SOA, that one disadvantage is the loss of insurance benefits in the industry fund. To counter this the adviser recommends that a minimal balance, say $10,000, be maintained in the old fund to retain the insurance benefits.

This is good advice, and in most cases we recommend advisers do this.

But the retention of insurance benefits is not an absolute rule. It does not automatically happen. It depends on the terms of the old super fund.

For example, the Australian Super product disclosure statement explains insurance continues after most monies are rolled out, with a small remaining balance, but will stop if certain events occur. It depends on whether the member is a “Personal Plan Member”. In summary, the PDS says:

  1. for Personal Plan members the insurance stops when there is no longer enough money in the member’s account to pay the premium but
  2. for other members:
    1. income protection insurance cover stops 13 months after the last employer contribution and
    2. life insurance and TPD insurance stops 13 months after the last employer contribution if the member’s account falls below $10,000.

Rule when advising clients to retain minimal balances in the old super fund for insurance purposes

Every fund has different rules regarding the continuity of insurance once member’s account balances fall below a specified amount or if contributions are not received within a particular time frame. what should you say when advising clients to retain minimal balances in the old super fund for insurance purposes?

First, and obviously, you need to read the old fund’s PDS. It’s a good idea to link it in to your SOA.

Second, you should make sure you draw any limits on the insurance to the client’s attention, and make sure the client stays within these limits and does not unknowingly lose the benefit of the insurances.

Finally, it’s wise to put a cap on the time the member relies on the old fund.

Suggested paragraphs for every SOA where the adviser recommends retaining benefits in the old fund

When you recommend a client retain benefits in the old fund to keep insurances then you must check the old fund’s PDS and ensure that the insurances do remain in place and that any limits or conditions are drawn to the client’s specific attention in your SOA.

Further, a mandatory clause is included in every SOA, via the Dover Client Protection Policy as follows:

“Minimum balances and other conditions on old super funds for the retention of insurance benefits

If we recommend you retain a minimal balance in your old super fund to retain insurance benefits you must make sure you continue to comply with any of your old super fund’s rules for the payment of insurance including time limits, minimum balances and minimum contributions.

It is your obligation to monitor the old super fund’s rules to ensure the insurances remain in place.

We are not required to monitor the old super fund’s rules to ensure the insurances remain in place and are not liable if for any reason you are not able to claim a benefit under the old super fund’s insurance arrangements.”

Feedback?

We value your thoughts. Contact Terry McMaster on terry@dover.com.au should you have any concerns about how this practice note applies to your clients or require assistance in any client matter.