Super Rules Change Could Affect Estate Planning

SMSF members may need to revisit their estate plan because of changes to the superannuation law effective from July 1. Until now, most estate planning involved a self-managed super fund member organising a reversionary pension. This was so that upon the member’s death, the surviving spouse could receive the deceased’s pension and would not need to sell any assets of the SMSF to satisfy the superannuation law’s compulsory payment requirement.

However, forthcoming changes not only limit the amount an SMSF member can have in their retirement pension account but also limits the amount a member can receive from their deceased spouse’s pension account. This is because the deceased’s pension will also count towards the surviving spouse’s transfer balance cap.

In turn this means that if the total of the surviving spouse’s own pension and the death benefit pension exceeds the transfer balance cap (currently at $1.6 million), the spouse will need to remove the excess above the cap from their SMSF and pay out a lump sum benefit. The surviving spouse can either remove money from their own pension account or remove money from the death benefit pension.

As death triggers a compulsory payment situation, they cannot transfer any of the deceased’s superannuation to their accumulation account. This may mean that assets will need to be sold to effect the payment of a lump sum death benefit.

When a member commences a retirement pension from an SMSF, the member would normally choose a reversionary pension. This is an income stream super benefit paid to an SMSF member where upon their death the pension continues to be paid to a nominated reversionary beneficiary as though that reversionary pensioner was the original pensioner. The only thing that changes is that when the pension is paid the following financial year, the minimum pension payment requirement is calculated using the reversionary pensioner’s age.

A non-reversionary pension, on the other hand, is an income stream superannuation benefit paid to an SMSF member that ceases upon the member’s death. The pension stops upon the death of the SMSF member, and the deceased’s superannuation will then need to be paid as either a lump sum and/or an income stream superannuation benefit.

Grace period

Now we already know that death triggers a compulsory payment situation under the law and therefore the deceased’s super cannot remain in the SMSF and must be paid as a reversionary pension, a new pension or a lump sum benefit. The deceased’s superannuation cannot be added to the accumulation account of the recipient member.

There may be some consolation in knowing that the government has provided a 12-month “grace” period for reversionary pensions. A reversionary death benefit pension is not counted towards a surviving spouse’s transfer balance cap until 12 months after the date of death. The amount counted is also the balance of the late member’s pension at their date of death even if it is paid 12 months later. If the deceased’s pension is non-reversionary, then the death benefit pension is counted immediately when it is paid to the surviving spouse and the amount counted is the deceased’s pension account at the date of payment.

Another area of estate planning that needs some consideration is death benefits payable to children of the deceased. Unlike a surviving spouse, a child under the age of 18, or aged up to 24 who is financially dependent on the deceased, or a child with a disability of any age can receive the deceased parent’s pension regardless of how much has accumulated in the pension account. This means, even if the deceased parent’s retirement account has grown above the transfer balance cap, currently $1.6m, the deceased’s child can maintain the pension account until either the child turns 25, when it needs to be paid out as a lump sum death benefit, or until the pension is exhausted if it is received by a child with a disability.

The changes in the super laws affect everyone in one way or another. Understanding the changes will enable you to make informed decisions on whether changes are required for your current estate plan.

Recent Posts

See All

ASIC Should Withdraw Its SMSF Factsheet

The Australian Securities and Investments Commission (ASIC) should withdraw its Self-Managed Superannuation Fund (SMSF) factsheet because it contains “an array of seemingly deliberate inaccuracies”, a

SMSFA Points To ASIC Fact Sheet Inconsistencies

The SMSF Association has criticised the corporate regulator’s focus on the risks of SMSFs in its mailout campaign targeting new trustees, saying the data sources used in its fact sheet are inconsisten