The above article deals with paying insurance out of super.
The lawyer says paying insurance premiums out of super fund assets reduces the amount available for retirement. The lawyer is, of course, quite wrong. Paying insurance premiums out of super fund assets does not reduce the amount available for retirement. It does the opposite. Paying insurance premiums out of super fund assets increases the amount available for retirement.
Let me explain.
Paying a premium out of super assets does not reduce the net wealth available for retirement compared to paying a premium out of non-super assets. Few clients have all their retirement wealth in super. If you pay the premium out of your super assets you reduce your super wealth. If you pay your premium out of your non-super assets you reduce your non-super wealth. But the tax benefit of paying your premium out of super means the overall effect on your long term wealth accumulation is positive… ie the amount available for retirement is increased, not decreased.
Any exceptions to the rule?
Most clients’ retirement prospects are maximized by paying the premium out of super. The exception is a client whose marginal tax rate is less than 15%, being the super contributions tax rate.
To look at the same issue another way: paying the premium out of super creates a net tax benefit where the client’s marginal tax rate is greater than 15%. This net tax benefit must mean more money is available for retirement.
What if the client consumes the benefit and does not apply it to retirement?
Of course the tax benefit is not preserved in super. It is a non-super benefit and it is available for immediate consumption.
The tax saving will probably be immediately consumed. But that’s the client’s call. It does not mean there is less available for retirement because the premium was paid out of super. It does mean there is less available for retirement because the client consumed the tax benefit.
There is nothing any adviser can do about it. It is what clients do.
It would be a gross negligence to not recommend a tax efficient strategy just because the client might consume the tax benefit now and not preserve it for retirement.
Imagine FOS’s reaction if you were to do that!
ASIC is wrong too
Nevertheless, this incorrect view, this misunderstanding of personal economics, is out there. In fact its everywhere.
For example, ASIC displays its misunderstanding at sub-paragraph 195(b) of Report 413 Review of Retail Life Insurance, when it criticises advisers for:
“writing the same level of cover but changing the source of the payments from direct cash flow to superannuation, without any adequate consideration of the impact of this strategy over the long term on the retirement savings of the client given their other relevant circumstances”.
ASIC obviously believes the impact is bad.
ASIC has gone well beyond mere criticism. It has imposed an enforceable undertaking (and a public pilloring) on an adviser who, ASIC says, “…failed in some cases to consider the competing priorities of adequate insurance versus affordability, including the longer term impact of placing insurances within superannuation…”.
(I wonder if ASIC will publicly apologize, vary its enforceable undertaking and amend Report 413? Sort of pillorize itself a bit. I expect it will not.)
What should you write in your SOA? How do you satisfy the best interests duty? How do you make sure your advice is appropriate to your client?
Yes, its hard being a financial planner. Even when you are right many will say you are wrong. Lawyers and ASIC for starters.
So what should you do now when you are advising your client to pay premiums out of super assets? How do you satisfy the best interests duty? How do you make sure your advice is appropriate to your client?
First, you should advise your client to pay premiums out of super. It is in your client’s best interests to do so. Prudent advisers recognize that not everyone fully understands this. So they play a hard defence, and go further to:
- include a warning in the SOA on running down super assets and
- suggest extra concessional contributions to match the extra premiums (which increases the overall tax benefit).
You could even link this article in to your SOA so you can really show FOS you got it right, and that ASIC and the lawyers got it wrong.
What does this article really show?
Perhaps the real insight in this article is to demonstrate how closely the harsh critics watch what we do, and hard they try to find fault.
FOS. ASIC. Lawyers. Anyone really. Anyone who can. And how the harsh critics often do not understand basic personal financial planning theory. And how hard it is to be a financial planner.