Leigh Mansell, director of SMSF technical and education services for Heffron, said it is important that advisers consider how death benefits work from the perspective of the surviving beneficiary.
“We need to look at it from their angle to identify whether the death benefit they’re receiving or about to receive suits their needs or have their circumstances changed. Is there anything you might want to think about doing to future-proof things for the survivor?” Mansell said.
“Should you be talking about their retirement planning needs, their estate planning needs, in the vein of potentially there being adult, financially independent children as the ultimate beneficiaries of the survivor’s super rather than focusing on a couple, and estate planning needs for them as a group?”
Mansell said reversionary pensions can pose problems for beneficiaries if they have not yet entered the retirement phase themselves.
“Imagine we’re dealing with a client who’s inherited a reversionary pension. What can they do with that particular pension? How does that affect them? And how does it affect other things they might want to do?” she said.
“Often, people get a little bit confused with how reversionary pensions operate. So your starting point, or the starting point for me, is the moment the original pensioner dies, and the reversionary pensioner takes ownership of that account balance.”
Mansell continued that in this scenario she is considering account-based pensions and transition to retirement pensions as the “bread-and-butter pension”.
“Essentially, we’ve got this shift in ownership over to the reversionary pensioner on the date of death. What happens if that reversionary pensioner hasn’t already triggered their transfer balance cap? The inheritance of that reversionary pension will trigger their TBC and it would be locked in at the general transfer balance cap of the year that it occurred,” she said.
“So, somebody inheriting a reversionary pension today who’s never had a retirement phase pension would have a $1.9 million personal transfer balance cap locked in.
“If somebody’s already got a transfer balance cap because they’ve got a pre-existing or an older account-based pension then we’re not triggering anything new.”
The next thing to consider, Mansell said, is the time frame, noting that 30 June is a trigger point.
“On 30 June following the original pensioner’s death, you have got to make sure that the normal minimum pension payment has been met. It could have been met before the original pensioner dying or after and drawn by the reversionary pensioner or some combination,” she said.
“It doesn’t matter, as long as by the time we get to the next 30 June, the minimum pension has been met in some way, shape or form, in combination between the original pensioner and the reversionary pensioner.”
Mansell continued that on 30 June, total super balance also comes into play. Namely, despite the reversionary pensioner owning that pension balance on the date of death of the original pensioner, total super balance is only measured on 30 June.
“It doesn’t come into play, or it’s not included in total super balance on the date of death, it’s only ever a point in time test. Every 30 June after that, any reversionary pension is included in the reversionary pensioner’s total super balance, which has consequences for things like contributions,” she said.
“Also when dealing with the reversionary pension, there’s going to be an amount that counts towards the reversionary pensioner’s transfer balance cap. It’s going to be the date of death value, but it won’t count for 12 months. This was built into the legislation deliberately to give reversionary pensioners some time so that if they needed to restructure their super to prevent them breaching their transfer balance cap, they could.”
