With the introduction of a $1.6 million transfer balance cap for a member to move assets into retirement phase, there was much conjecture as to how the Government will provide for a tax dependant beneficiary who was automatically entitled to continue an income stream (as a reversionary beneficiary).
Currently, the law allows for a pension to continue without consideration of the quantum of the death benefit. With the introduction of the transfer balance cap, there was always going to be a capping of the benefit in retirement phase, but the question was whether the:
- surviving beneficiary would inherit the value of the deceased member’s (transfer balance) account? or
- amount would transfer to the surviving spouse and count towards their balance?
From 1 July 2017, where a new beneficiary becomes the recipient of a reversionary super income stream upon the death of the primary member, a credit will arise in respect of the income stream based upon the market value at the time of the member’s death.
A deferral period of 12 months (changed from 6 months) will apply prior to the credit being applied to the new beneficiary’s transfer balance account. This deferred period gives the beneficiary sufficient time (where necessary) to adjust their affairs following the death of a relative before such amount may trigger an excess transfer balance cap breach.
To understand how this works, let’s look at the following example:
John is in receipt of an account based pension (ABP) with a current value of $1 million at the time of his death on 1 August 2017. This pension was to automatically revert to his wife Jane, who is currently in receipt of a pension that was credited to her transfer balance (TB) account for $800,000 at 1 July 2017. Note: The current value of Jane’s pension is irrelevant after being credited to her TB Account.
As John’s pension is to automatically continue for Jane, she is advised that, unless she acts, the combined value of her two pensions will cause a breach of her balance transfer cap ($1.6 million). Jane will have until 1 August 2018 to make an adjustment to one or more of her existing income streams to comply, otherwise the excessive amount would have notional earnings applied and be subject to excess transfer balance tax.
On 1 December 2017, Jane decides to partially commute $200,000 from her existing income stream and roll back the amount to her accumulation interest. Thus, when the credit of John’s income stream is applied to Jane’s transfer balance account (on 1 August 2018), she will not have breached her transfer balance cap.
The introduction of the transfer balance cap only further highlights the importance of structuring income streams and considering very carefully how you will optimise for retirement and estate planning purposes. In this example, it would be important to consider from which pension to commute from and consider whether to retain the amount within accumulation or payout as a lump sum.
To find out more about structuring income streams in the new super landscape post 1 July 2017, join Aaron for his upcoming SMSF Day events around Australia between 8 – 16 November 2016. To find out more and to register, visit www.smsfday.com.au