Recent discussion about the so-called ‘de facto death duty’ levied on superannuation payouts to non-dependants, which includes payouts on life insurance held in super, highlights that pre-retirees should reassess how insurance is held and what cover is needed, says Mr Michael Hutton, head of wealth management at accountants and advisors HLB Mann Judd Sydney.
“There is nothing new in the fact that superannuation balances paid to non-dependants on a member’s death is taxed, while payments to dependants (e.g. a spouse or child under 18) are tax-free – this has applied for some time.
“However, the recent discussion does suggest not enough consideration is given to tax implications – and the status of insurance policies – when fund members retire.
“When a member was working, there may have been tax advantages in holding life insurance in the fund, but there can be disadvantages to keeping it in the fund after retirement – such as payouts being taxable in the hands of non-dependants.
“It also raises the question, why should people be paying for life cover when they don’t have dependants?
“There may be exceptions in a very few instances, but generally life insurance is intended to look after dependants.
“Even when a retiree has dependants, if there is enough in their superannuation, coupled with other savings, to look after them, is life insurance needed anymore?
“Most Australians are underinsured but there may be instances where people are over-insured because of a change in circumstances, which is why regular reviews are so important.
“It may well be that some insurance should be cancelled – or even reduced if there is still a major item of debt that may affect a surviving spouse, such as the balance of any mortgage on the home,” he said.
Mr Hutton also advises that those about to retire should check existing policies to see if they are paying for income protection insurance.
“When they are no longer receiving, or even dependent on, earned income, this insurance could well be a waste of money, even in pre-retirement years,” he said.
HLB Mann Judd Sydney is a firm of accountants and business financial advisers, and a member of the HLB Mann Judd Australasian Association.
For more information please contact:
Michael Hutton – 02 9020 4194