Advisers warned on reversionary ABP timings impacting TSB strategies

However, the balance of the account-based pension counts towards the reversionary beneficiary’s total superannuation balance immediately, which may impact their situation from the start of the next financial year.

“When a client dies, and their account-based pension automatically reverts to a reversionary beneficiary, a credit equal to the value of the account-based pension at the date of death arises in the beneficiary’s transfer balance account,” Mr Sanderson said.

“However, the credit does not arise until 12 months from the date of death. This 12-month grace period allows the reversionary beneficiary time to adjust their affairs (if necessary) to stay within their transfer balance cap.”

In an example, Mark and Sophie each commenced $900,000 account-based pensions on 1 August in a financial year and nominated each other as a reversionary beneficiary. Mark dies on 1 December in the same financial year (at which time his account-based pension balance is $950,000), and his pension reverts automatically to Sophie.

“A credit of $950,000 will arise in Sophie’s transfer balance account, but not until 12 months after Mark’s death, on 1 December in the following financial year. Sophie, therefore, has 12 months to make changes to ensure that she does not exceed her transfer balance cap,” he said.

“Assuming Sophie’s personal transfer balance cap is valued at $1.644 million and that she wishes to keep as much of her retirement savings as possible in the superannuation environment, she could partially commute $206,000 of her existing pension back to accumulation phase, and a debit of $206,000 would arise in her transfer balance account (the balance would then be $694,000).

“The credit of $950,000 that arises from her reversionary pension on the following 1 December would then take the balance of her transfer balance account to $1.644 million (equal to her personal transfer balance cap).”

Treatment of income streams from TSB and reversionary pension

For total superannuation balance purposes and the treatment of the reversionary pension, the value of a client’s retirement phase income stream is the balance of their transfer balance account, adjusted for the current value of account-based income stream, according to Mr Sanderson.

Where a pension other than an account-based income stream (e.g. a lifetime annuity) reverts to a reversionary beneficiary, the value won’t be counted towards their total superannuation balance until it is credited towards their transfer balance account (e.g. 12 months after death).

“However, where an account-based income stream reverts to a reversionary beneficiary, the total superannuation balance rules require the current value of any account-based income streams to be included regardless of whether there has been a credit for that income stream in the client’s transfer balance account,” he said.

“Therefore, the current value of the reversionary income stream counts towards the beneficiary’s total superannuation balance from the first relevant calculation time after death – which is the next 30 June.”

For example, Mark and Sophie each commenced $900,000 account-based pensions on 1 August in a financial year and nominated each other as a reversionary beneficiary. Mark dies on 1 December in the same financial year (at which time his account-based pension balance is $950,000), and his pension reverts automatically to Sophie.

“Mark’s pension starts to count towards Sophie’s total superannuation balance from the first relevant calculation time after death – which is the next 30 June. Assuming that at the next 30 June, her own pension balance is $950,000 and the reversionary pension balance is $970,000 (and Sophie has no other superannuation interests), Sophie’s total superannuation balance at that 30 June is $1.92 million,” Mr Sanderson noted.

“This, in turn, may impact her eligibility for certain superannuation concessions, which are based on a member’s total superannuation balance, in the following financial year. For example, assuming an upper non-concessional contributions threshold of $1.7 million (2021-22), Sophie would have a non-concessional cap of nil in the following financial year.”

As a result, reversionary ABP recipients may need to take action before or consider the impact from 30 June following the date of death. While a reversionary account-based pension recipient has 12 months from the date of death to sort out their transfer balance cap situation, Mr Sanderson observed, the pension balance starts to count towards their total superannuation balance effectively from the next 30 June following the date of death.

“A client’s total superannuation balance at 30 June prior to a financial year determines their eligibility for concessions such as the non-concessional contributions cap, ability to use carried forward concessional contributions caps, ability to make personal contributions between age 67-74 using the work test exemption, and the ability to receive government co-contribution or spouse contributions tax offset.

“Clients in receipt of a reversionary account based pension, therefore, need to consider their changed eligibility for one or more of the above concessions from the start of the financial year following the date of death (rather than 12 months from the date of death), or may need to take action before 30 June after the date of death in order to maintain their eligibility to these concessions.”