Timing key for trustees on death benefit pensions
SMSF professionals need to consider the type of pension a trustee is receiving upon the death of a spouse when deciding what action to take to minimise the tax consequences of such a pension, according to SuperConcepts.
In a recent blog, the SMSF service provider’s executive manager of SMSF technical and private wealth, Graeme Colley, said pensions inherited by a surviving spouse in an SMSF would be counted towards a member’s transfer balance cap at different times depending on whether the pension was reversionary or an income stream from a death benefit.
“There is a special rule which applies to reversionary pensions which delays counting the value of the reversionary pension against the TBC until 12 months after [the spouse’s] death,” Mr Colley said.
“Unlike the special treatment given to the measurement of reversionary pensions against a person’s TBC, an account-based pension is counted against a TBC once the pension commences.”
Mr Colley used the example of Veronica, whose husband Phil passed away in February 2019, leaving a pension valued at $1.3 million.
Following Phil’s death, if his pension was reversionary, Veronica would have a year to decide how to manage this in conjunction with her own pension of $600,000.
“There are many things Veronica could do to comply with her TBC: She could reduce the reversionary pension balance by $300,000, which would mean the balance would be $1 million and her pension will remain at $600,000,” Mr Colley said.
“She could [also] reduce the value of her account-based pension by $300,000 and transfer it to the accumulation account in the fund. This would maximise the amount Veronica has in superannuation and keeps it within her TBC of $1.6 million.”
However, if Phil’s pension was non-reversionary but Veronica decided to take the death benefit as a pension, she would have to reorganise both pensions to fit her TBC before commencing the death benefit pension, Mr Colley said.
“This means that Veronica may need to consider her options very soon after becoming entitled to Phil’s death benefit,” he explained, citing three possible options for her to consider to remain compliant with TBC rules.
“She could keep her account-based pension which has a TBC value of $600,000 and commence a death benefit pension with $1 million. The additional $300,000 is required to be withdrawn from the fund as a lump sum.
“She could commute $300,000 of her account-based pension and transfer it to accumulation phase in her fund. [Or] she could commute $300,000 of her account-based pension and withdraw it as a lump sum from the fund and commence a death benefit pension with the whole of Phil’s death benefit.”