28/02/2018

What to do with the deceased member's death benefit pension to avoid any transfer balance cap issues for the surviving member/spouse depends on the type of pension the surviving spouse is receiving.

The superannuation advisory industry is still coming to grips with the effect of the 1 July 2017 changes to superannuation laws that have changed the definition of death benefit and limited the tax benefits of pension accounts which exceed $1.6 million.

The changes will materially affect the estate planning of members, including those who have already had their estates planned and thought that all was tickety-boo for the future of their death benefit transfers.

There may be a need for advisers to review the arrangements their clients have in place  and to assess how they stand up as a result of these changes. Many estate plans and estate planning strategies may need adjustment.

Do clients appreciate that it may no longer be a good idea for their super death benefit pension to automatically revert to their spouse on their death or, in some cases, that it might be better for their pension to be reversionary than to permit any flexibility by using a death benefit nomination instead?

Pensions paid to a surviving spouse are assessed against the surviving spouse’s transfer balance cap and that survivor does not inherit their deceased partner’s cap. This is different to a death benefit lump sum which effectively comes out of the deceased’s superannuation environment and is not affected by the transfer balance cap issues because it is coming out of the super system.

How the transfer balance cap will apply where a pension is to be paid on death will be dependent on whether the death benefit pension starts as a reversionary pension or a death benefit nomination pension.

How the transfer balance cap will apply depends on whether the pension transfers to the spouse (by reason of being a reversionary pension) or whether the trustee issues the pension pursuant to a binding death benefit nomination

A number of issues can be compared in both situations which are highlighted in the table below.

For further information, please contact Townsends Business & Corporate Lawyers on (02) 8296 6222.