SMSFs warned on traps with child pensions
SMSF trustees have been reminded by an industry lawyer that where they already have binding death benefit nominations in place, they may be restricted from implementing strategies involving child pensions.
Cooper Grace Ward partner Scott Hay-Bartlem says with the introduction of the transfer balance cap, child pensions have become increasingly relevant for certain SMSF trustees.
Mr Hay-Bartlem warned that where trustees already have binding documents in place such as a BDBN for a spouse, however, they may be locked out from being able to use child pensions.
“For example, someone with $3 million in super may want to direct part of their money to the surviving spouse and part [of it] to the child’s pension, but typically they’ll have a binding death benefit nomination in place for the surviving spouse. That means you can’t use the child pension strategy,” he explained.
Child pensions create a separate transfer balance cap for the child and they can’t be used alongside a binding death benefit nomination.
“So people might lock themselves out from being able to use it or they don’t have the choice or the flexibility in order to be able to use it,” Mr Hay-Bartlem said.
While there are some downsides with child pensions and aren’t suitable for all clients, they can be useful for certain types of clients.
“I’ve had clients in their 60s with children under 18 where there’s a lot of money in super so it’s potentially a really good strategy, particularly for children with disabilities,” Mr Hay-Bartlem said.