TBC indexation to create various complexities in death benefits

“If a member chooses a reversionary pension, they will nominate a dependant, usually their surviving spouse, as the reversioner to automatically receive the pension from the time of their death. In some cases, it is possible to amend the member’s pension terms so it converts from a non-reversionary to reversionary pension or vice versa if the change is made prior to their death,” Mr Colley said.

“On the death of the member, a reversionary pension becomes automatically payable to the surviving dependant and is reported to the ATO for transfer balance cap purposes as at the date of the member’s death.”

However, Mr Colley said the information provided to the ATO is not counted against the reversioner’s TBC until the anniversary of the deceased’s death.

The purpose of the delay is to provide the reversioner with some time to adjust their life after the death of a loved one, he noted. 

“The main benefit for super purposes is that the surviving dependant is able to retain any pension(s) they are receiving plus the value of any reversionary pension in a tax-exempt environment in the fund for at least a year after the member’s death,” Mr Colley said.

“In contrast to a reversionary pension, if a surviving dependant decides to commence a death benefit pension, it will commence from the amount in the deceased’s accumulation account and/or the amount remaining after a non-reversionary pension has ceased. 

“For transfer balance cap purposes, the amount that commences the death benefit pension is counted on its commencement day. It is not given the 12-month leeway provided to reversionary pensions.

“The indexation of the transfer balance cap from $1.6 million to $1.7 million from 1 July 2021 allows anyone who has become entitled to a reversionary pension on or after 1 July 2020 to have access to some, if not all, of the $100,000 indexed amount. 

“The reason is that the 12-month delay in counting the reversionary pension will occur from 1 July 2021 which is after the indexation has taken place.”

Case study: Changes to death benefit strategies

In a case study, Mr Colley gave an example of Camilla who was in receipt of an account-based pension which had a balance of $1.3 million when she died on 1 August 2020. She nominated her husband Marco as her reversioner. 

“The balance of the pension at the time of Camilla’s death was reported to the ATO and will be counted as a credit against Marco’s transfer balance cap on 1 August 2021,” Mr Colley said.

“As Marco has never been in receipt of a superannuation income stream, the balance of the reversionary pension will be counted against the $1.7 million indexed transfer balance cap. This would leave him with an unused cap amount of $400,000, which could be used to commence another income stream from his superannuation balance.”

Mr Colley noted if Camilla commenced a non-reversionary pension instead and it had a balance of $1.2 million when she died on 1 August 2020, it would be up to Marco to commence a death benefit income stream.

“If he commenced the income stream on 1 October 2020, the balance would be counted against the $1.6 million transfer balance cap. This would leave him with an unused cap amount of $300,000, which could be used to commence an income stream from his superannuation balance,” he said.

In another example, Maurice had a balance of $900,000 in his account-based pension at the time of his death on 1 December 2020, and named Jill as his reversioner. Jill commenced an account-based pension on 1 July 2018, with a balance of $1.2 million which was counted as a credit against her TBC.

“As Jill has used up $1.2 million or 75 per cent of her transfer balance cap, she will only get the benefit of part of the indexed amount, which is the unused percentage of the cap. Therefore, her transfer balance cap limit will increase from 1 July 2021 by $25,000 or 25 per cent of her unused cap, from $1.6 million to $1.625 million,” Mr Colley explained.

“Jill will need to decide before 1 December 2021, which is the anniversary of Maurice’s death, on what to do with the income streams that she is entitled to. Otherwise, she will end up with an amount that is in excess of her transfer balance cap.

“The excess will be $475,000, which is the difference between Jill’s indexed transfer balance cap of $1.625 million less the combined balance of the pensions counted against the cap, which is $2,100,000 ($1.2 million plus $900,000).”

There are probably a number of options Jill has to deal with the excess, according to Mr Colley. This would include commuting the balance of the pension she commenced in the fund by $475,000, and transferring the amount to her accumulation account in the fund, or withdrawing it as a lump sum from the fund, or a combination of both.

“Commuting $475,000 from Maurice’s reversionary pension and she will be required to withdraw it as a lump sum. Jill does not have the option of transferring a death benefit to her accumulation account in the fund,” Mr Colley said.

“The most likely tax-effective option for Jill would be to maximise the amount retained in the fund by partially commuting her pension and transferring it to her accumulation phase account in the fund.

“If Maurice had not nominated a reversioner for his pension, she would be limited to using $400,000 to commence the death benefit pension and would be required to take the remainder of Maurice’s death benefit as a lump sum ($500,000).”