Ronald is 60 years of age and recently sought to commence a superannuation pension. His accumulated superannuation savings amounted to approximately $400,000 – wholly a taxable (taxed) component. Ronald was also looking to make a $200,000 non-concessional contribution (NCC) using the bring-forward provisions.

Ronald has a spouse, Rowena, who is 50 years of age. He also has one child from a previous relationship, Nicole, who is now an independent adult. The couple has had no children together.

In the event of death, Ronald would like Rowena to receive approximately 75 per cent of his retirement savings, with the remaining 25 per cent going to Nicole.

As a surviving spouse, Rowena will qualify for a tax-free lump sum death benefit. Nicole, who is a non-dependant, will incur tax of up to 16.5 per cent (including Medicare Levy) on the lump sum death benefit’s taxable (taxed) component.

The analysis below looks at the estate planning implications under two options. For simplicity, it is assumed pension balances at the time of death are unchanged. It is also assumed no additional product fees are incurred under Option Two.

OPTION ONE – commence a pension for $600,000

Prior to commencing a pension, Ronald can make a $200,000 NCC to his existing superannuation account, bringing its total balance to $600,000. Subsequently, a pension can be purchased for $600,000 – 33.33 per cent of which would be a tax-free component and 66.67 per cent a taxable component. This ratio would remain in place for the life of the pension.

Death benefits for Rowena

No anti-detriment payable by provider

Rowena’s gross lump sum payment of $450,000 will comprise a $150,000 tax-free component and a $300,000 taxable (taxed) component. As a dependant, Rowena will receive the $450,000 payment free of tax.

Anti-detriment payable by provider

If Ronald’s superannuation fund pays antidetriment payments from pensions, Rowena’s net lump sum position will be enhanced. According to the Australian Taxation Office (ATO) formula, an anti-detriment payment could be as high as 17.65 per cent of the lump sum’s taxable component (where the deceased’s service period start date occurs on or after July 1, 1988). The ATO formula may be used if the trustee is unable to quantify actual contributions taxes paid.

As a best-case scenario, Rowena’s gross lump sum would be the $450,000 payment from Ronald’s account balance plus an anti-detriment equal to 17.65 per cent of $300,000 (that is, the taxable component payable from Ronald’s account balance). The gross lump sum payment is therefore $502,950. This will be received free of tax.

Death benefits for Nicole

 No anti-detriment payable by provider

Nicole’s gross lump sum payment will be $150,000. Her net lump sum payment will be $133,500: = (Gross lump sum x tax-free proportion) + [(Gross lump sum x taxable proportion) x (1 – 16.5%)] = ($150,000 x 33.33%) + [($150,000 x 66.67%) x (1 – 16.5%)]

Anti-detriment payable by provider

As a best-case scenario, Nicole’s gross lump sum would be the $150,000 payment from Ronald’s account balance plus an anti-detriment equal to 17.65 per cent of $100,000 (that is, the taxable component payable from Ronald’s account balance). The gross lump sum payment is therefore $167,650.

In net terms, Nicole’s lump sum entitlement would be $149,208: = (Gross lump sum x tax free proportion) + [(Gross lump sum x taxable proportion) x (1 – 16.5%)] = ($167,650 x 33.33%) + [($167,650 x 66.67%) x (1 – 16.5%)]

OPTION TWO – commence two separate pensions totalling $600,000

Ronald instead commenced a $400,000 pension (pension A) with his existing superannuation savings – wholly a taxable (taxed) component. Following this, Ronald made a $200,000 NCC and commenced a separate pension (pension B) – wholly a tax-free component.

In the event of death, Nicole will receive her death benefit entitlement from pension B. To achieve the desired percentage split, Ronald will need to regularly update each pension’s death benefit nominations to ensure Rowena and Nicole receive approximately 75 per cent and 25 per cent respectively of the combined pension balances.

Death benefits for Rowena

No anti-detriment payable by provider

Rowena will receive a gross lump sum payment of $400,000 from pension A and $50,000 from pension B. The net lump sums will equate to $450,000 as Rowena does not pay tax on these payments.

Anti-detriment payable by provider

From pension A, Rowena’s gross lump sum would be the $400,000 payment from Ronald’s account balance plus an anti-detriment equal to 17.65 per cent of $400,000 (that is, the taxable component which is to come from Ronald’s account balance). The gross lump sum payment is therefore $470,600. Rowena will also receive a $50,000 lump sum from pension B. This comprises a tax-free component. Total net lump sums payable to Rowena will be $520,600.

Death benefits for Nicole

Nicole’s gross lump sum payment will be $150,000, payable as a tax-free component from pension B. The anti-detriment payment is not payable as the lump sum does not contain a taxable component. Her net lump sum payment will be $150,000.

In summary, based on the above stated assumptions, Rowena would be better off under Option Two by $17,650 and Nicole by $792.

Rudy Haddad is national manager for technical services for ING Australia

Ronald is 60 years of age and recently sought to commence a superannuation pension. His accumulated superannuation savings amounted to approximately $400,000 – wholly a taxable (taxed) component. Ronald was also looking to make a $200,000 non-concessional contribution (NCC) using the bring-forward provisions.

Ronald has a spouse, Rowena, who is 50 years of age. He also has one child from a previous relationship, Nicole, who is now an independent adult. The couple has had no children together.

In the event of death, Ronald would like Rowena to receive approximately 75 per cent of his retirement savings, with the remaining 25 per cent going to Nicole.

As a surviving spouse, Rowena will qualify for a tax-free lump sum death benefit. Nicole, who is a non-dependant, will incur tax of up to 16.5 per cent (including Medicare Levy) on the lump sum death benefit’s taxable (taxed) component.

The analysis below looks at the estate planning implications under two options. For simplicity, it is assumed pension balances at the time of death are unchanged. It is also assumed no additional product fees are incurred under Option Two.

OPTION ONE – commence a pension for $600,000

Prior to commencing a pension, Ronald can make a $200,000 NCC to his existing superannuation account, bringing its total balance to $600,000. Subsequently, a pension can be purchased for $600,000 – 33.33 per cent of which would be a tax-free component and 66.67 per cent a taxable component. This ratio would remain in place for the life of the pension.

Death benefits for Rowena

No anti-detriment payable by provider

Rowena’s gross lump sum payment of $450,000 will comprise a $150,000 tax-free component and a $300,000 taxable (taxed) component. As a dependant, Rowena will receive the $450,000 payment free of tax.

Anti-detriment payable by provider

If Ronald’s superannuation fund pays antidetriment payments from pensions, Rowena’s net lump sum position will be enhanced. According to the Australian Taxation Office (ATO) formula, an anti-detriment payment could be as high as 17.65 per cent of the lump sum’s taxable component (where the deceased’s service period start date occurs on or after July 1, 1988). The ATO formula may be used if the trustee is unable to quantify actual contributions taxes paid.

As a best-case scenario, Rowena’s gross lump sum would be the $450,000 payment from Ronald’s account balance plus an anti-detriment equal to 17.65 per cent of $300,000 (that is, the taxable component payable from Ronald’s account balance). The gross lump sum payment is therefore $502,950. This will be received free of tax.

Death benefits for Nicole

 No anti-detriment payable by provider

Nicole’s gross lump sum payment will be $150,000. Her net lump sum payment will be $133,500: = (Gross lump sum x tax-free proportion) + [(Gross lump sum x taxable proportion) x (1 – 16.5%)] = ($150,000 x 33.33%) + [($150,000 x 66.67%) x (1 – 16.5%)]

Anti-detriment payable by provider

As a best-case scenario, Nicole’s gross lump sum would be the $150,000 payment from Ronald’s account balance plus an anti-detriment equal to 17.65 per cent of $100,000 (that is, the taxable component payable from Ronald’s account balance). The gross lump sum payment is therefore $167,650.

In net terms, Nicole’s lump sum entitlement would be $149,208: = (Gross lump sum x tax free proportion) + [(Gross lump sum x taxable proportion) x (1 – 16.5%)] = ($167,650 x 33.33%) + [($167,650 x 66.67%) x (1 – 16.5%)]

OPTION TWO – commence two separate pensions totalling $600,000

Ronald instead commenced a $400,000 pension (pension A) with his existing superannuation savings – wholly a taxable (taxed) component. Following this, Ronald made a $200,000 NCC and commenced a separate pension (pension B) – wholly a tax-free component.

In the event of death, Nicole will receive her death benefit entitlement from pension B. To achieve the desired percentage split, Ronald will need to regularly update each pension’s death benefit nominations to ensure Rowena and Nicole receive approximately 75 per cent and 25 per cent respectively of the combined pension balances.

Death benefits for Rowena

No anti-detriment payable by provider

Rowena will receive a gross lump sum payment of $400,000 from pension A and $50,000 from pension B. The net lump sums will equate to $450,000 as Rowena does not pay tax on these payments.

Anti-detriment payable by provider

From pension A, Rowena’s gross lump sum would be the $400,000 payment from Ronald’s account balance plus an anti-detriment equal to 17.65 per cent of $400,000 (that is, the taxable component which is to come from Ronald’s account balance). The gross lump sum payment is therefore $470,600. Rowena will also receive a $50,000 lump sum from pension B. This comprises a tax-free component. Total net lump sums payable to Rowena will be $520,600.

Death benefits for Nicole

Nicole’s gross lump sum payment will be $150,000, payable as a tax-free component from pension B. The anti-detriment payment is not payable as the lump sum does not contain a taxable component. Her net lump sum payment will be $150,000.

In summary, based on the above stated assumptions, Rowena would be better off under Option Two by $17,650 and Nicole by $792.

Rudy Haddad is national manager for technical services for ING Australia