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Self Managed Super Fund (SMSF) Article
Stone hearted large fund trustees

By Tony Negline.

This article may be out of date.

18th October 2006

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There are many reasons why some people prefer to use a Self Managed Super Fund.  Control and flexibility are common reasons because the members of the fund are .

As a way of counteracting these arguments large super funds often claim that these reasons are overstated.  Sometimes however facts can show how impersonal large funds can be and as a result make some people realise that any negative aspects about running their own super fund are relatively minor.

"Small is beautiful" as E.F. Schumacher said (no relation to the Formula 1 racing driver to the best of my knowledge!).

The example I relate involves a women dying of ovarian cancer.  We will call her Susan.  This type of cancer is often a silent killer because it’s generally not detected until it is too late for treatment to have a positive impact.

Susan worked before her initial diagnosis but unsurprisingly ceased work as soon as her health began to deteriorate.

Sadly there is little prospect of living much longer.  Now as you might expect there is also no prospect of returning to work.  Under the current super laws she would be considered to be “permanently incapacitated”.  A person satisfies this definition if they stop work due to ill health and a super fund trustee is reasonably satisfied that the person is unlikely, because of ill-health, ever again to engage in gainful employment for which the member is reasonably qualified by education, training or experience.

Once this definition is satisfied any money preserved in the super system can be paid as a lump sum or pension.  Tax concessions will be available on these benefits if two medical practitioners certify that the person will be never be able to be employed in a capacity for which they is reasonably qualified because of education, training or experience.  Note that this definition is similar to the one used by the super laws but the tax concessions are only available if two medical certificates are provided.

These definitions are quite strict but not as harsh as the “any occupation” definition which some life insurance policies have.  This definition effectively says that if you can perform any function – such as licking postage stamps – then you are not totally and permanently disabled.

Some life insurance companies use a “your occupation” definition.  This type of policy would pay a benefit if you can no longer perform the job you had when you ceased work.  This is the least strict definition.

Now a tricky thing for all super fund trustees is to ensure that the contract terms of any total and permanent disability insurance they buy for fund members matches the super law definition mentioned above and also the TPD definition contained in their fund’s trust deed.

When a super fund’s has to assess a member’s claim for TPD a process has to be followed.  Facts have to be gathered and assessed.  Medical reports have to be cited in order to get the tax concessions.  Super fund trustees are expected to take the job of assessing these claims seriously.  If they do not, they could be accused of failing to take their super law obligations properly.

And it is here that Susan’s predicament becomes apparent.  Over the years she changed jobs and belongs to several super funds.  TPD claims have been made to each fund requesting that her account balance be paid out before she dies.  They have been apprised of her shortened life expectancy via statements from her oncologist and her general practitioner.

Every fund refused to assess her claim until it is presented strictly in accordance with the funds’ particular requirements including insisting that the application be made on their own forms.  No fund was happy to get a solicitor’s certified copy of another fund’s application form or general letter from medical professionals.  Some funds insisted that she go to their nominated doctor in order to have her claim assessed.

One fund offered her four different types of benefits.  The last one was a mixture of lump sum and pension.  This seemed the best option and was selected.  Pension payments started but no lump sum arrived.  When the fund was queried about this they said she wasn’t eligible for that style of benefit.  Why offer something that is not available?

Susan was expected to go to unreasonable lengths to get her account balance paid out.  One must wonder why especially given the fact that the account balances were not particularly large.  Now certainly these benefits could be paid out after death but it suits Susan and her family to have the money now to help them put some of their affairs in order before she dies.

A small but interesting fact is that all these funds are either Industry Funds or government public service funds.

Some financial planners have told me that a public offer fund would not behave in this way because the sales and marketing people would be concerned that their lack of compassion would cause them problems.  They may be right.  I have seen situations where this is true.  But the popular media regularly carries stories of life insurance companies refusing to pay life policy claims.

Most of us own our home rather than rent because of the control it gives us.  We don’t want to be at the mercy of anyone else’s whim and fancy.  Susan’s sad tale shows us why this might also apply to our superannuation investments.

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