ANZ technical services manager Rahul Singh said while it is well understood that reversionary death benefit income streams are provided with concessional treatment under the transfer balance cap, reversionary defined benefit income streams introduce an extra layer of complexity.
Mr Singh reminded practitioners that the credit against the transfer balance account for a reversionary spouse beneficiary is the value at date of death and is deferred to 12 months from date of death. The deferral of the credit allows time to restructure super income stream balances to comply with the transfer balance cap.
However, for reversionary defined benefit income streams, he explained, there is the conversion of the defined benefit income under a special value calculation. This is based on the first payment, annualised, multiplied by a factor of 16.
“It is this special value conversion that requires close examination as specific scheme rules can provide somewhat anomalous outcomes, when assessing the reversionary spouse’s transfer balance account,” he explained.
“Understanding an individual’s transfer balance account is crucial in calculating any restructuring of account based pensions that may need to occur.”
Mr Singh used the example of John, who receives an indexed CSS pension of $3,076.92 per fortnight or $80,000 per annum, to help explain where the complexity arises.
“He passes away, leaving his spouse, Mary, a reversionary pension. Based on CSS scheme rules, he elected his spouse to receive 67 per cent of his pension upon his death, which amounts to $2,061.54 per fortnight or $53,600 per annum,” he explains.
“Ignoring the defined benefit income, Mary’s transfer balance account is $1 million as her SMSF held a $1 million account based pension as at 30 June 2017.”
Within 12 months of reversion of the CSS pension, the practitioner, he explained, would need to determine how much of her existing account-based pension is required to be commuted to comply with the $1.6 million transfer balance cap.
“One would ordinarily think that the special value of the reversionary CSS pension is $859,957 ([2,061.54 / 14] *365 * 16). As she had a credit of $1 million on 30 June 2017 and no further debits, one would initially assume, Mary’s remaining transfer balance cap space is $600,000,” he explained.
“With the reversionary CSS pension giving rise to a credit of $859,957, she would exceed the transfer balance cap by $259,957 ([$1 million + $859,957] – $1.6 million).”
Mr Singh said some practitioners might think that by commuting $259,957 of her existing account-based pension, Mary would be within the transfer balance cap.
“Unfortunately, this is not the case because of the unique CSS rules. Section 94 (3) of Superannuation Act 1976 broadly states that if CSS are informed of death within seven fortnights, the reversionary spouse is eligible to receive the pre-death pension rate for a maximum period of seven fortnights from date of death. The maximum period would include the number of fortnights the deceased spouse continued to receive the higher rate, capturing delays in notification of death,” he said.
“Assuming Mary informs CSS within seven fortnights of John’s death her first fortnightly entitlement would be based on the pre-death amount of $3,076.92 per fortnight. Despite the rate reducing to $2,061.54 per fortnight, 67 per cent of the pre-death rate, in due course the credit to the transfer balance account would in fact be $1,283,515 ([3,076.92 /14] * 365 * 16).”
As a result, Mr Singh said she is required to commute $683,515 (1,283,515 + 1,000,000 – $1.6 million), rather than the $259,957.
CSS acknowledges that despite the rate being temporary, they are required to report the transfer balance account credit based on the first pension payment, he said.
“Where clients are potential recipients of reversionary defined benefit income stream and are likely to be affected by the transfer balance cap, scheme rules in regards to the first payment post death should be checked, in assessing the reversionary’s transfer balance account,” he cautioned.
“This would then allow practitioners to assess amounts that can be retained in account-based pensions and other income streams to comply with the transfer balance cap.”
