Once you’ve fully grasped and met with clients affected by the changes to contributions and the pension phase, you will need to become familiar with how the reforms have affected super and estate planning.
This can broadly be broken down into the changes to death benefit nominations and other estate planning considerations.
Death benefit nominations
The introduction of the transfer balance cap (TBC) of $1.6 million that applies to retirement phase income streams may warrant reviewing the death benefit nominations a client has put in place for their superannuation.
Clients with a retirement phase pension may want to complete a reversionary death benefit nomination, where the pension will automatically continue to be paid to the nominated beneficiary.
A key benefit of doing this is that the beneficiary will have 12 months from the date of death before a credit is recorded in their transfer balance account (TBA) in relation to the death benefit pension.
This gives the beneficiary time to address their affairs and make arrangements to commute an amount from either the death benefit pension or their own member pension, which will be desirable if the death benefit pension will cause them to exceed their available TBC.
The credit to the reversionary beneficiary’s TBA will reflect the value of the pension at the date of death of the original member. Any earnings on the pension in the 12-month period will not affect the TBA.
If a client wants to add a reversionary nomination to an existing pension, they may need to cancel and restart the pension. Not only will this reset annual minimum pension payment requirements, it may have adverse social security consequences if the pension is grandfathered.
Some funds will allow a reversionary nomination to be added or amended without having to start a new pension. You will need to check with each fund directly to understand the options available.
Other estate planning considerations
If some of a death benefit is likely to be paid to financially independent adult children, the client may consider the benefit of using a re-contribution strategy.
This strategy can increase the tax-free component of the superannuation benefit and reduce the tax that would be payable on a death benefit.
Alternately, it may be desirable to withdraw some or all of the super balance prior to death and either pay the money to adult children as an ‘early inheritance’ or invest outside super to mitigate death benefit tax on super proceeds.
Provided the fund member is over 60 or otherwise capable of receiving the benefit tax-free (under the low-rate cap), then no tax would be payable on the amount withdrawn. However, this strategy may only be appropriate where the fund member is either terminally ill or very elderly, or where the tax outcomes of investing outside super and taking advantage of an effective tax-free threshold make financial sense.
Previously, the loss or reduction of future anti-detriment entitlements had to be factored in when determining the net benefit of this strategy. This strategy may therefore be more appealing, as anti-detriment payments will no longer be paid where a death occurred on or after July 1, 2017.
That rounds out the key areas to master post-super reform and the most important discussions to have with your clients on contributions, pensions and estates. After one of the biggest rounds of changes in the history of superannuation in this country, you may be breathing a sigh of relief – and with informed support from you, their adviser, we’re sure your clients are too.
Richard Edwards is a technical expert at MLC.