In a recent blog, the SMSF service provider’s executive manager of SMSF technical and private wealth, Graeme Colley, said pensions inherited by a surviving spouse in an SMSF would be counted towards a member’s transfer balance cap at different times depending on whether the pension was reversionary or an income stream from a death benefit.
“There is a special rule which applies to reversionary pensions which delays counting the value of the reversionary pension against the TBC until 12 months after [the spouse’s] death,” Mr Colley said.
“Unlike the special treatment given to the measurement of reversionary pensions against a person’s TBC, an account-based pension is counted against a TBC once the pension commences.”
Mr Colley used the example of Veronica, whose husband Phil passed away in February 2019, leaving a pension valued at $1.3 million.
Following Phil’s death, if his pension was reversionary, Veronica would have a year to decide how to manage this in conjunction with her own pension of $600,000.
“There are many things Veronica could do to comply with her TBC: She could reduce the reversionary pension balance by $300,000, which would mean the balance would be $1 million and her pension will remain at $600,000,” Mr Colley said.
“She could [also] reduce the value of her account-based pension by $300,000 and transfer it to the accumulation account in the fund. This would maximise the amount Veronica has in superannuation and keeps it within her TBC of $1.6 million.”
However, if Phil’s pension was non-reversionary but Veronica decided to take the death benefit as a pension, she would have to reorganise both pensions to fit her TBC before commencing the death benefit pension, Mr Colley said.
“This means that Veronica may need to consider her options very soon after becoming entitled to Phil’s death benefit,” he explained, citing three possible options for her to consider to remain compliant with TBC rules.
“She could keep her account-based pension which has a TBC value of $600,000 and commence a death benefit pension with $1 million. The additional $300,000 is required to be withdrawn from the fund as a lump sum.
“She could commute $300,000 of her account-based pension and transfer it to accumulation phase in her fund. [Or] she could commute $300,000 of her account-based pension and withdraw it as a lump sum from the fund and commence a death benefit pension with the whole of Phil’s death benefit.”
I believe the same logic would apply. If Veronica had 600k in pension, she would need to pursue a strategy that means she doesn’t exceed her cap. Therefore, I think it doesn’t matter what husbands pension was at 30/6/17, rather it matters what Veronica’s cap will be.
Happy to be wrong / learn.
If the husband’s pension balance was $1.9 million on death ($1.6 million as at 30/6/17 having grown in pension phase due to investment earnings after complying with minimum pension payouts) wouldn’t Veronica be able to retain $1.9 million in pension without breaching her transfer balance cap?