Smarter SMSF chief executive Aaron Dunn said where a client is due to receive a reversionary pension, advisers may want to consider opportunities with contributions before it is potentially too late.
If the reversionary pension is going to tip the client over the total super balance threshold for making non-concessional contributions, then there may only be a short window of time in which they can get extra contributions into the fund, Mr Dunn explained at the SMSF Day.
He gave the example of two members, Frank and Judy, who are both receiving account-based pensions with balances of approximately $1.2 million. They are reversionary.
The pensions were started in October 2014 and so are grandfathered for Commonwealth Seniors Health Card (CSHC) purposes. They both have non-super assets, but they’re below the threshold for a couple.
“Frank then passes away, and Judy is likely to lose the CSHC as the income is now too high for a single person,” he said.
Mr Dunn said there is a couple of important things to be aware of from a timing perspective with this example.
“The important thing to remember is that the test for the total super balance is at the start of the financial year. When we think about the fact she has a reversionary pension, this means she becomes automatically entitled to that pension at the date of her husband’s death. The credit for transfer balance cap purposes will apply 12 months after the date of death,” he explained.
“So in essence, she has an entire year to get her affairs sorted out to ensure compliance. However, her ability to contribute based on the TSB is based on the TSB value she had at 1 July previously, so her TSB value will only be $1.2 million.”
This means she still has the opportunity to tip more money into super, he said.
“However, she only has until 30 June that year because she became automatically entitled to the pension of her husband from his date of death, which means when we get to the next financial year her total super balance has jumped from $1.2 million to $2.4 million so she is knocked out at that point in time,” he explained.
“So we have this finite window to be able to leverage contributions where relevant.”
