Are you ready for the 1 July 2017 super changes? Part 3: Interaction of the $1.6m pension transfer cap and death benefit payments

Created on March 20, 2017 10:10 am

In last month’s Part 2 of the super changes newsletter, “I have more than $1.6m in pension phase so what are my options?”, we discussed the $1.6m Transfer Balance (“TBC”) and “Transfer Balance Account (“TBA”).

Not only does this TBC affect members who are currently receiving pensions from their self -managed fund (“SMSF”), but it also impacts members upon death and their estate planning. It is important to understand how the TBC impacts death benefit payments, and plan for this now to ensure appropriate arrangements are made prior to the introduction of the TBC on 1 July 2017.

The main estate planning issue is the effect of Reversionary Pensions versus Non-Reversionary Pensions and the interaction with a member’s TBC and the nominated beneficiary’s TBC. Here are some considerations when deciding whether a Reversionary or Non-Reversionary Pension is appropriate for your succession planning strategy for your Account Based Pension (“ABP”).

Note: for pension to be reversionary it must be automatic, documented in the pension commencement minutes, so there is no trustee discretion to pay to another beneficiary or in a different form such as a lump sum.

Reversionary Pensions Non-Reversionary Pensions
Death benefit payment – when does it have to be paid? Automatic reversion to the nominated beneficiary (eg. to surviving spouse) upon death of member Cashed “as soon as practicable” *
Can the pension form part of the member’s Estate No Possibly – the SMSF trustee has discretion on how benefits are paid subject to the rules of the trust deed

 

The super benefits can be paid to the dependants &/or Legal Personal Representative of the deceased member

Transfer Balance Account (“TBA”) impact Credit to the reversionary beneficiary’s TBA occurs 12 months after member’s date of death

 

The amount credited to the TBA is the market value of the ABP at date of death – hence any growth or decline in the pension from date of death and over the 12 month period is excluded

If a death benefit pension is paid, the recipient’s TBA is credited when the pension commences

 

The amount credited to the TBA is the market value of the new ABP at commencement date

 

 

 

 

Minimum pension payments required A minimum pension payment is required in the year of death based on the deceased member’s pension percentage then it changes to the recipient’s pension percentage on the subsequent 1 July. No minimum pension payment is required in the financial year of death

 

* ”as soon as practicable” – there is no specific definition on what constitutes “as soon as practicable” however if the death benefit lump sum payment or a new pension commences after 6 months there should be reasonable reasons for this, not simply for tax reasons or inconvenience.

Example – Reversionary Pension

Consider Jack and Jill who both start reversionary ABPs from their SMSF valued at $1m and $1.6m respectively at commencement on 1 July 2017.

Jill passes away on 30 June 2018 and their pension interests are now valued at $1.3m for Jack and $2m for Jill.

On 30 June 2019, 1 year after Jill’s date of death, her pension is valued at $2.2m and Jack’s at $1.5m.

What has to happen 12 months from date of Jill’s death?

On 30 June 2019, Jill’s $2m ABP reverts to Jack. The TBC for Jack is $1.6m so Jill’s reversionary $2m pension will trigger an excess of his TBC if he doesn’t do anything. Jack has two choices:

  1. Commute all of Jack’s pension and keep as much of Jill’s pension in the fund

Jack commutes his pension now valued at $1.3m back to accumulation resulting in a negative TBA of $300k ($1m being original pension value – $1.3m commutation value on date of Jill’s death) and can commence a new death benefit pension of up to $1.9m in order to stay under his TBC of $1.6m. He starts a death benefit pension of $1.9m and must take the excess of $100k as a death benefit lump sum. Thus $3.2m of the $3.3m pension balance at date of death remains in the super fund .

  1. Retain Jack’s pension and keep as much of Jill’s pension in the fund

On date of death Jack could commence a death benefit pension of $600k ($1.6m TBC – $1m being original pension value) and then take the $1.4m remaining of Jill’s pension as a death benefit lump sum.

Example – Non-Reversionary Pension

In the above example, if a reversionary pension was not in place and Jack had exercised his Trustee’s discretion on 30 June 2019 to receive a death benefit pension, the outcome would be as follows:

  1. Commute all of Jack’s pension and keep as much of Jill’s pension in the fund

Jack commutes his pension now valued at $1.5m back to accumulation on 30 June 2019 resulting in a negative TBA of $500k and can commence a new death benefit pension of up to $2.1m. He starts a death benefit pension of $2.1m and must take the excess of $100k as a death benefit lump sum.

  1. Retain Jack’s pension and keep as much of Jill’s pension in the fund

On 30 June 2019 Jack could commence a death benefit pension of $600k ($1.6m TBC- $1m being original pension value) and then take the $1.6m remaining of Jill’s pension as a death benefit lump sum.