Speaking at a seminar in Sydney, SMSF Association head of technical Peter Hogan said the SMSF Association is currently in discussion with Treasury and has written submissions to the government about some of the issues in the system facing disabled children.
“I think the system has failed disabled children in the sense that they are limited in the amount of assets that can be used to pay a pension, because they’re just treated like any other child,” Mr Hogan explained.
“They don’t have to wind up their pension at age 25, but the amount of capital they’re allowed to actually apply to a pension when an adult dies is still limited just as it is for other children. The difference is though that the other children don’t have to live on it for the rest of their lives.”
The other limitation, he said, is that insurance can’t be included in the assets that support a pension on the death of the parent.
“So insurance has to be paid out as a lump sum benefit to children with disabilities as well as children with no disabilities, so that strategy of having insurance inside superannuation to fund a decent income stream for disabled children also doesn’t work under this new regime as well and we think it should,” he said.
“Just as structured settlements should be excluded from the transfer balance cap regime, we think these arrangements for disabled children should be too. So that’s something that we’re talking to Treasury about at the moment.”
Mr Hogan noted that while there are other options, they tend to be more complex.
“You can direct [the money] to an estate, you can set up disability trusts through the estate, or testamentary trusts through the estate, or whatever you think is appropriate for that particular child and do it that way. There are alternatives, but they’re just a bit more convoluted.”
I wouldn’t think that is necessarily the case re insurance in every instance. If we presume a codependency relationship a reversionary pension (if established and preferential) will be allocated to the the child beneficiary at date of death whilst insurance proceeds will be allocated at receipt. This allows for a scope of significant insurance proceeds to make their way into a death benefit pension without breaching the transfer balance cap.