Strategy tips flagged with indexation and death benefit pensions
A technical expert has explained how the type of pension and the timing of when it’s commenced can impact whether a client can access the increase in the transfer balance cap.
Speaking in a recent SMSF Adviser podcast, SuperConcepts senior SMSF technical specialist Anthony Cullen said there can be some confusion from SMSF clients when it comes to reversionary and non-reversionary pensions and how the increase in the general transfer balance cap will apply.
Mr Cullen gave an example of a couple where the husband has passed away on 1 March. The husband had an account-based pension of $1.9 million, he explained.
“Whether that pension is reversionary or not will have a big impact on the transfer balance account for the spouse,” he noted. While the credit for that event might not appear for 12 months, Mr Cullen stressed that the actual event is the pension reverting to that spouse on the date of death.
“We still get a lot of people not understanding that the event itself is the pension commencing for the recipient. So, if the husband died on 1 March with a reversionary pension, that pension reverts to the spouse on that day, that is the event, and that is the event that needs to be reported,” he said.
“A lot of people will say ‘I’ve still got 12 months before I need to report that’ and it’s not the case, you need to report the event based on the reporting obligations as they stand.”
In terms of when the credit appears, is where it really comes into its own, he said.
“The husband dies on 1 March and the $1.9 million reverts to the spouse so that credit to the spouse will not appear until 1 March 2024. Now, if that spouse has never had a retirement phase pension, then come 1 July this year, they’re going to get the full indexation, so their transfer balance cap is going to be $1.9 million,” he explained.
One area where people can get caught out, he warned is that once that pension has reverted it belongs to that surviving spouse.
“So come 30 June, it’s going to count towards their total superannuation balance. So although it doesn’t count towards their transfer balance cap, it does count towards their total super balance,” he cautioned.
“That may have an impact on strategies they have in terms of contributions as it will mean their non-concessional cap for 2023–24 income year is zero.”
“So you may want to make those contributions this year instead.”
Where the pension is non-reversionary or there is an accumulation account, the trustees will go through the normal process of dealing with the death benefit.
“Let’s assume the wife is going to receive that money and she’s going to start a death benefit pension with it. The law says that you have to start a pension as soon as practicable but it doesn’t tell us what as soon as practicable is,” he noted.
“The general consensus is that if you deal with in within six months, it’s unlikely that you’re going to be challenged on whether you dealt with it as soon as practicable.
“So, if you’re looking at someone who passed away on 1 March, that six months will soon span across two financial years.”
Where a death benefit pension differs from a reversionary pension, Mr Cullen explained, is that with a reversionary pension the balance of the credit is determined on the date of death and the credit appears 12 months later.
“With a death benefit pension, the balance is determined on the day that the pension is commenced and the credit appears on that day,” he said.
“So if the wife starts a pension before the 30th of June, then they’re going to be measured against the cap as it is now at $1.7 million.”
Given the balance is roughly $1.9 million, Mr Cullen said it is likely that some of that money will need to come out of the system.
“Just like the reversionary pension, that money is now an interest of the wife which means it’s going to count towards her total super balance at 30 June as well,” he said.
However, if the pension isn’t started till after 1 July, the big difference is that we’ve now got that higher cap because the cap will be determined on that day.
“Whether the wife needs to take some money out of the system will be based on what the value of the account is at that time. However, the likelihood is that even if she does have to take some out, it’s going to be a lot less than what she would if she starts the pension prior to that date,” he noted.
“The other aspect is that because she hasn’t started the pension with it yet, it’s not an interest of hers. So it will not count towards her total super balance either. So that may free up some opportunities in terms of making contributions.”