‘Protecting Your Super’ laws are making retirement savers think about the life insurances they need.’
The new ‘Protecting Your Super’ laws which came into effect on 1 July 2019, are designed to ensure that super accounts are not unnecessarily eroded by fees and insurance premiums.
Most people with superannuation have insurance cover attached to their superannuation account. If you join a fund through your employment, you will usually have automatic cover put in place once the fund receives Superannuation Guarantee contributions from your employer.
While avoiding unnecessary fees is a plus for anyone with a small superannuation account balance, the automatic cancellation of insurance cover in inactive super accounts is a double-edged sword as it may lead to the unintended cancellation of crucial insurance cover, in an attempt to save fees and premiums.
The good news is that if you're in this category, you can actively elect to keep your insurances! Most superannuation fund providers are sending their members letters that can simply be signed and returned by the member. Some providers email their members and include a link to the superannuation fund website where you can opt-in to keep your valuable insurance cover. If you haven’t received any communication, but think you should have, you should reach out to your adviser, or your fund.
While this opt-in rule may be useful for some people who had lost touch with their superfunds, or they didn’t know the account was set up for them in the first place, there are equally strong reasons to retain the insurances that exist inside their superannuation funds.
Under the Government’s Protecting Your Super package, there are a number of initiatives introduced that are designed to protect members from paying unnecessary fees and insurance premiums. Let’s look at these in more detail below.
Cap on fees for low balance accounts
From 1 July, 2019, low balance accounts with an account balance below $6,000 will have a cap applied to the total fees (excluding insurance premiums and advice fees) that can be charged to members of 3% of your account balance.
Ban on exit fees from super funds
If you are thinking about switching super funds — the good news is it's now a lot cheaper. Exit fees cost super fund members about $52 million each year. However, as at 1 July 2019, super funds were banned from charging exit fees on withdrawals.
Auto-cancellation of insurances in inactive super funds
Inactive super funds are those which have not received a contribution or rollover over 16 consecutive months. Those accounts impacted include accounts that are inactive as at 1 July 2019, or become inactive on or after 1 July 2019.
If you were previously covered for life insurance through your super account, you will need to opt-in to retain your life insurance cover.
There are three types of personal insurances that your super fund can offer you: life insurance, total and permanent disablement (TPD) and income protection insurance (also known as salary continuance).
Insurance products are fairly well known to most people. But why would you access them through your super?
For most people the fact that insurance premiums paid from your superannuation account do not impact your personal cash flow and the tax effective premium structures available in the superannuation environment, make insurance policies held inside super very attractive.
However, one major drawback is that the insurance premiums deducted from your account balance will reduce the amount of super that is available when you retire. This is the issue the government is trying to address with this new legislation. However, with the blanket cancellation of superfund members’ cover the individual needs and circumstances of each member cannot be taken into account. Many members may choose to sacrifice some of their super savings over time to ensure their families are not left in financial difficulty if they experience an event that renders them too sick to work, or if they pass away…In fact, tens of thousands of ordinary Australians successfully claim on their super insurances every year, with annual claims payout figures amounting to many billions of dollars. This has helped provide a vital financial injection to the members of their families during a difficult time.
Inactive low balance super accounts transferred to the ATO
To protect accounts from fee erosion, from 1 July, 2019 superannuation providers are required to report inactive accounts for members under age 65 with balances less than $6,000.
The definition for inactive account is slightly different to the one that deals with insurance opt-in. Here the account is classified as inactive if there are no contributions or rollovers to the member's account over 16 consecutive months, AND during that period the member has not switched investment options, has not changed or cancelled insurance cover, has not changed or made a death benefit nomination and has not provided the super fund trustee with an authority to notify the ATO that the account is still active.
In these instances, these balances will be transferred to the ATO. Within 28 days of receiving this money, the ATO will, where possible, transfer it to a member's active super account if they have one, provided the total balance in that active account will exceed $6,000 after the transfer by the ATO. If the ATO is unable to transfer the member's balance to an active super account, the ATO will retain it on the member's behalf and the ATO will not charge fees and will credit earnings equal to the Consumer Price Index (CPI).
We are ready to assist you
If you would like to speak to an expert about your super, your insurance or other financial planning needs, we’d love to hear from you. Your Wealth Market Financial Adviser is ready to assist you.