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Superannuation

Death Benefits and The Transfer Balance Cap

By Graeme Colley
Executive Manager, SMSF Technical and Private Wealth - SuperConcepts Sydney, Australia

On 4 August our article on the dangers of underpaying pensions illustrates the potential increased tax liability if your SMSF does not stay within the pension rules. After reading the article one of our readers, reminded us not to forget the impact of a person’s Transfer Balance Cap if they become entitled to a reversionary or death benefit pension.

In this article, we will cover the impact on someone who becomes entitled to an additional pension because of the death of their spouse.

Let’s use two case studies to illustrate how a person’s Transfer Balance Cap (TBC) is impacted if they become entitled to a pension on the death of their spouse. In the first case study we will look at a person who becomes entitled to a reversionary pension which is automatically payable to the surviving spouse. In the second case study we will look at a surviving spouse who decides to commence a death benefit income stream.

Case Study 1

Phil commenced an account-based pension on 1 July 2018 with $1.4 million, which was the total amount of his superannuation balance. The account-based pension was reversionary so that his wife, Veronica, would automatically become entitles to the pension on Phil’s death. Veronica commenced an account-based pension on 31 October 2018 with her superannuation balance of $600,000.

For purposes of the TBC, the value of the account-based pension commenced by Phil and Veronica will not be excessive as both pensions come within their respective TBCs of $1.6 million.

Unfortunately, Phil died on 1 February 2019 and Veronica automatically became entitled to Phil’s account-based reversionary pension. The value of the reversionary pension at the time of Phil’s death was $1.3 million. As Veronica has become entitled to the reversionary pension, the balance at that time will be counted against her TBC. However, there is special rule which applies to reversionary pensions which delays counting the value of the reversionary pension against her TBC until 12 months after Phil’s death.

Veronica now must decide what to do with her superannuation as she will need to reduce the total value of the pensions counted for TBC purposes of $1.9 million ($1.3 million plus $600,000) down to $1.6 million by 1 February 2020. There are probably many things that Veronica can do to comply with her TBC, here are three options:

  1. She could reduce the reversionary pension balance by $300,000 which would mean the balance of the reversionary pension would be $1 million and her pension measured for TBC purposes will remain at $600,000. The reduction in the reversionary pension is required to be withdrawn as a lump sum.
  2. She could reduce the balance of her account-based pension by $300,000 and transfer it to the accumulation account in the fund. This would maximise the amount Veronica has in superannuation and keeps it within her TBC of $1.6 million.

  3. She could reduce the balance of her account-based pension by $300,000 and withdraw it from the fund as a lump sum to comply with the $1.6 million TBC.

Case Study 2

Let’s assume that Phil commenced an account-based pension on 1 July 2018 with $1.4 million but it was non-reversionary. It is usually left up to Veronica to decide how to withdraw Phil’s death benefit which could be as a lump sum, death benefit pension or combination.

Veronica commenced an account-based pension on 31 October 2018 with $600,000 and on Phil’s death on 1 February 2019 the balance of his pension was $1.3 million.

Let’s assume that Veronica wishes to commence an account-based pension from Phil’s death benefit. Unlike the special treatment given to the measurement of reversionary pensions against a person’s TBC, once an account-based pension is counted against Veronica’s TBC once the pension commences. If Veronica commenced the death benefit pension in March 2019 the value would be counted against her TBC at that time.

This means that Veronica may need to consider her options very soon after becoming entitled to Phil’s death benefit. Here are three possible options for her to consider:

  1. She could keep her account-based pension which has a TBC value of $600,000 and commence a death benefit pension with $1 million. The additional $300,000 from Phil’s death benefit is required to be withdrawn from the fund as a lump sum.
  2. She could commute (convert) $300,000 of her account-based pension and transfer it to accumulation phase in her fund. This would allow her to use all of Phil’s death benefit to commence a death benefit pension.
  3. She could commute (convert) $300,000 of her account-based pension and withdraw it as a lump sum from the fund and commence a death benefit pension with the whole of Phil’s death benefit.

In the end, it’s the type of pension that is paid due to the death of the member that determines how and when it is measured against the survivor’s TBC. It’s helpful in these cases to seek advice on how the rules work to make sure it produces the best result for you.

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Graeme Colley, Executive Manager, SMSF Technical and Private Wealth, SuperConcepts
  • SMSF News
  • Superannuation
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Important notes

While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455)  (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

 

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