We have received many questions from readers about how the new $1.6 million transfer balance cap will operate when a fund member dies, especially if the fund member has arranged for his or her spouse to receive a superannuation death benefit pension, including a reversionary pension. This article provides a brief outline of how such pensions are treated for the $1.6 million transfer balance cap when the widow or widower, or other dependant, starts receiving such a super pension.
Note: If you are looking for a broader summary of how the $1.6 million transfer balance cap rules will operate, see SuperGuide article Burden for retirees: Monitoring the $1.6 million transfer balance cap. The $1.6 million transfer balance cap, taking effect from 1 July 2017, became law in November 2016 (passed both houses on 23 November 2016, and received royal assent on 29 November 2016).
Under the new $1.6 million transfer balance cap rules, taking effect from 1 July 2017, each individual in Australia will have their very own transfer balance cap. For the 2017/2018 year, the transfer balance cap is $1.6 million, and this represents the total amount that an individual can transfer to pension phase (retirement phase) over their lifetime. This cap will be indexed periodically in $100,000 increments in line with CPI increases.
Each individual in Australia also will be given a transfer balance account when they first start a super pension. The transfer balance account will help the individual monitor his or her super transfers into pension phase, against his or her transfer balance cap. If you exceed your transfer balance cap you will be forced to move money out of the pension phase (unless you have a defined benefit pension, and then special rules may apply – see SuperGuide article Defined benefit pensions and the $1.6 million transfer balance cap).
If you are already in pension phase and you expect to have more than $1.6 million in pension phase, then when 1 July 2017 comes along, you will be expected to have restructured your affairs, by 1 July 2017, to bring your pension account/s below the $1.6 million limit.
If you die, your transfer balance cap dies with you, even if you have arranged for a reversionary pension to be paid to your spouse from your pension account, or arranged for a new death benefit superannuation pension to be paid to your spouse from the proceeds of a superannuation death benefit.
The implications for a couple, especially a couple who may both be close to their respective transfer balance caps, is that the surviving spouse in receipt of a superannuation death benefit pension will have the value of that death benefit pension added to his or her transfer balance account.
According to the original exposure draft explanatory materials, he or she would then have only 6 months to restructure their affairs to ensure the transfer balance account is under the surviving spouse’s transfer balance cap. In October 2016, I asked the question, “Does anyone else consider 6 months a very short timeframe for a grieving spouse to restructure his or her affairs, especially when other estate planning issues can take up to 12 months and longer to resolve?”
The good news is that someone in government agrees with SuperGuide, and the timeframe for restructuring the affairs of a surviving spouse to meet the transfer balance cap rules, has been extended to 12 months BUT ONLY IN RELATION TO REVERSIONARY PENSIONS.
The harsh 6-month timeframe remains for other superannuation death benefit pensions (that is, those commenced on the death of the fund member), although the legislation does not say ‘6 months’, it actually refers to ‘as soon as practicable’. According to recent guidance from the ATO, ‘soon as practicable’ normally means the timeframe would not exceed 6 months from the date of death. If a longer period than 6 months is required, the ATO’s view is that the trustees of the super fund should be able to demonstrate why it was not practicable to pay the death benefit within 6 months. Presumably this guidance applies to the use of the term ‘as soon as practicable’ in this latest legislation.
What counts towards a person’s transfer balance account?
According to the explanatory memorandum (Chapter 3) accompanying the legislation, the following amounts are credited towards an individual’s transfer balance account:
- The value of all superannuation interests that support superannuation income streams in the retirement phase that the individual is receiving on 30 June 2017
- The commencement value of new super income streams (including new superannuation death benefit income streams and deferred super income streams) in the retirement phase on or after 1 July 2017.
- The value of reversionary superannuation income streams at the time the individual becomes entitled to them (note that the surviving spouse does not inherit his or her spouse’s transfer balance cap).
- Excess transfer balance earnings that accrue on excess transfer balance amounts.
Note that investment losses or investment gains are not deducted or added, respectively, to a person’s transfer balance account. Pension benefit payments do not reduce a person’s transfer balance account either.
Note: To assist mainly advisers and accountants, the ATO has released a Law Companion Guideline on death benefits and the transfer balance cap (see SuperGuide article July 2017 super changes: ATO Guidance Notes and Law Companion Guidelines.
Important: The treatment of defined benefit death benefits pensions is similar to how regular defined benefit pensions are dealt with under the transfer balance cap rules: see SuperGuide article Defined benefit pensions and the $1.6 million transfer balance cap.
Special treatment for child death benefit pensions
A child dependant who receives a superannuation death benefit pension after the death of a parent, does inherit his or her parent’s transfer balance cap, to an extent. The child’s transfer balance cap is based on the value of the retirement assets at that time he starts receiving the death benefit pension.
The special treatment of child dependants recognises that such a dependant must be under the age of 25 to receive a death benefit pension, and once they reach the age of 25 they must commute the pension and cash out the money. If the child suffers a permanent disability, then he or she is not required to cash out the pension, and can continue the pension until the money runs out.
When a child dependant is compelled to cash out the death benefit pension before the age of 25, his or her transfer balance account is reset. At a later date, when he or she commences their own super pension/s, the individual will have his or her own transfer balance account and transfer balance cap, based on the general transfer balance cap.
Note: To assist mainly advisers and accountants, the ATO has released a Law Companion Guideline on death benefits and the transfer balance cap (see SuperGuide article July 2017 super changes: ATO Guidance Notes and Law Companion Guidelines
For more information on superannuation death benefits see the following SuperGuide articles: