The changes proposed by the government to superannuation (although yet to be legislated) could impact on the ability for some Australians to hold life insurance in super.
One such change is the proposed reduction in the concessional superannuation contributions cap for all individuals, down to $25,000 a year from July 1, 2017.
This could limit the amount people can provide for their retirement. As a result, they could decide that it no longer makes sense to pay premiums for life insurance out of their superannuation balance.
As an example, Felix is under 50 and has been contributing $30,000 to superannuation each year.
He has structured his life insurance through his superannuation fund, paying premiums of $5,000 a year.
Felix is on the top marginal tax rate of 49 percent which includes Medicare Levy and Temporary Budget Repair Levy for the 2017/2018 financial year.
If the superannuation changes are legislated, Felix will only be able to contribute $25,000 per annum from July 1, 2017. These contributions will be further eroded by the insurance premiums he will pay inside his superannuation fund.
Key is that life insurance premiums inside superannuation are deductible to the fund at the rate of 15 percent a year. But life insurance premiums outside of superannuation are not tax deductible to an individual.
If Felix were to transfer the policy outside super, he would need to allocate an additional $10,000 of his income to fund the premium.
If he deducted this from his annual super contribution, this would leave only $15,000 to go toward super.
After tax, this would only amount to $12,750 a year going into super.
If, however, he were to leave the policy inside his superannuation fund his member balance would increase by $17,000 a year.
Everybody’s situation is different so it’s important to get advice before making any changes to superannuation and life insurance approaches.
Peter Speechley, wealth management and superannuation partner, HLB Mann Judd Perth