Key Superannuation Changes for July 2017: Estate Planning
The new rules will require pension accounts to be no more than $1.6 million per person on the commencement of the pension or 1 July 2017 for existing pensions.
The Government chose to give no concession whatsoever for the situation of a person who receives a pension because of the death of another, typically the person’s spouse.
This is going to mean that it will be the spouses’ combined amounts, which will be important, and if over $1.6 million combined will, on the death of one, trigger the pension penalties due to the “transfer balance cap”.
So two spouses with say $1 million in pension each (and hence are each within their respective “transfer balance cap”) will run into problems on the death of one.
As the deceased member’s benefit has to be paid as soon as practicable following death (due to the SIS Regulations), the death benefit cannot be left in the fund, and accordingly will need to be paid out as a lump sum, or the pension continued.
If the pension reverts and there are transfer balance cap problems, the choices are:
- to take the death benefit (all or part) as a lump sum so the pension limits are met;
- to commute and take the person’s own pension (all or part) as a lump sum (subject to having met a condition of release allowing benefits to be paid);
- to roll back the person’s own pension (all or part) into the accumulation phase.
The ability to “roll back” is not available for the death benefit, as the benefit must be paid.
Which alternative (or combination) is best will depend on a number of factors, including the tax-free and taxable components, the amounts in question, and the tax advantage of leaving money in super (and paying tax at the 15/10% rates) as compared to taking money out, and investing it separately.
The time to consider this is within 12 months of the death benefit commencing to be paid as a pension, which is either on:
- death (for an automatic reversion) or
- on the trustee’s decision to pay a pension (if not automatic).
Automatic reversions continue the tax exemption in the fund, however shorten the time at which the new “transfer balance cap” limits apply, and hence action taken if needed.
How pensions are structured need to be reviewed with clients.
In discussing superannuation benefits including pensions with clients, the licensing requirements need to be met.
In this regard ASIC has recently issued some guidance on accountants giving advice, in a release entitled “AFS Licensing Requirements for Accountants who provide SMSF Services”.
If you require any assistance, please contact us.