Lawyer flags traps with changes to reversionary pensions
The decision to make pensions reversionary should be carefully considered following the reforms to super as it could have significant implications for beneficiaries down the track, warns an industry lawyer.
Cooper Grace Ward partner Scott Hay-Bartlem says it is vital SMSF practitioners and their clients are aware of the impact of balance caps when thinking about whether pensions should be reversionary or whether alternative strategies should be used.
“For example, child pensions can definitely have some transfer balance cap benefits for people with kids that we can pay pensions to,” Mr Hay-Bartlem said.
“[However,] making a binding death benefit nomination out to a surviving spouse could lock out the option of having child pensions to kids.”
Mr Hay-Bartlem said there are also other considerations that need to be made in relation to timing and how the affairs will be handled after the SMSF trustee dies.
“Post-2016 budget, when you get a death benefit as an income stream, it gives you a credit in your own transfer balance account as a recipient, so it [potentially] gives us transfer balance cap issues,” he said.
“With a reversionary pension, if the transfer balance account credit happens 12 months after death, it becomes inevitable [that it counts towards your cap]. If we don’t have a pension which is reversionary [however] and we choose to pay the spouse the income stream as a pension, then it means we choose to time when the pension counts towards the balance cap.”
In some cases, it can take some surviving spouses quite some time to be able to deal with details such as super after their spouses have died and 12 months isn’t always enough for someone to be able to make their plans with the $1.6 million transfer balance cap.
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.