When the new pension transfer balance cap system was announced, I mistakenly thought reversionary pensions could create unnecessary problems and result in someone exceeding the $1.6 million limit.
After a closer examination of the legislation, however, and after gaining an understanding of how and when the value of a reversionary pension is treated as a credit in a member’s transfer balance account (TBA), it appears they provide more certainty than an account-based pension.
When a member dies and they are receiving an account-based pension, the trustees of the fund must deal with the member’s benefits within a reasonable amount of time. The choices available include paying a death benefit pension to a dependant, paying out a death benefit lump sum, or a combination of both.
Where a death benefit pension is paid, the value reported in the dependant’s TBA is the value of the pension at the date that the pension commences. If there is a delay between the death of the member, and the date the pension commences, the value recorded as a credit in the dependant’s TBA is the value of the deceased’s pension account plus any accumulated earnings.
To make sure that a dependant receiving a reversionary pension is not disadvantaged, the date that the value of the reversionary pension is recorded in their TBA is delayed, depending on when the reversionary pension commenced.
Reversionary death benefit pensions that commenced prior to July 1, 2017, have the value of the pension counted as a credit in their TBA as at July 1, 2017, or 12 months from the date of death of the deceased member.
Reversionary pensions that commence on or after July 1, 2017, have the value of the pension at the date of the member’s death recorded as a credit in the surviving member’s TBA 12 months after the date that the reversionary pension commenced.
The delay in the recording of the value of a reversionary pension provides enough time for the reversionary pensioner to get advice and make a decision to ensure they do not exceed the $1.6 million cap.
Where the combined value of a reversionary death benefit pension and an existing account-based pension will not exceed the $1.6 million limit, no action is required. However, if the reversionary death benefit pension results in the pension transfer balance cap being exceeded, clients have two options:
- Commute the excess value over the $1.6 million limit from the account-based pension and roll this amount into an accumulation account
- Commute the excess from the death benefit pension and take this amount as a lump sum and invest it outside of superannuation.
Which of these options is best will depend on whether the surviving member wants to maximise their income tax benefits, or wants to minimise the amount of tax payable on any superannuation that will pass to their non-dependants upon their death.
Where the surviving member has no other income, other than the superannuation pensions that they receive, commuting the excess out of the reversionary death benefit pension and investing it personally could make sense.
If the surviving member’s taxable income means that they are already paying tax personally, commuting the excess from their existing account-based pension and rolling it back into an accumulation account could be the best option, if maximising their tax benefits is important.
If minimising the tax paid on superannuation to non-dependants is the main consideration, the pension account with the lowest tax-free component is the one that should be partially commuted.
The SMSFA Technical Day, next week, features a series of sessions on the transfer balance cap and estate planning. To register, click here.