In less than three months, the changes to super will have kicked in. For many superannuants, the focus has been deciding on whether they can afford to make additional contributions to super this financial year before the contribution limits drop. For those who are drawing a private pension and have more than $1.6 million in their pension account, the focus is perhaps on how to restructure their arrangements to comply with the new rules commencing on 1 July, 2017.
The above are important considerations but what a lot of people haven't turned their minds to, is the hidden impact which the super changes will have when someone passes, particularly where a death benefit is likely to be paid as a pension. The impact is in the reduction of tax effectiveness of pensions due to the $1.6 million transfer balance cap measure. It is important to think about this now so that estate planning strategies can be reviewed to ensure one's estate planning goals can be fulfilled and any adverse tax implications can be avoided, or at least minimised.
With spouses, current strategies typically involve keeping a deceased member's superannuation in the superannuation system for as long as possible. This often means that on the death of a member, a surviving spouse will receive the deceased's death benefit as a pension - it may be a "reversionary pension" or a "non-reversionary pension" (for example, the deceased was still in accumulation mode and the fund trustee exercises its discretion to pay a pension to a surviving spouse, or the deceased was receiving a pension but on their death, the trustee has discretion about how to deal with the deceased's superannuation).
The concept of the $1.6 million transfer balance cap can significantly impact these strategies and will often make it very difficult for a deceased member's superannuation to remain in the superannuation system. An example of this is where the surviving spouse has a substantial superannuation balance of their own and the payment of the death benefit causes the surviving spouse to exceed the transfer balance cap. The surviving spouse has the following options:
- Commute all/part of their pension or the death benefit back to an accumulation account (six months after commutation to accumulation they will be treated as member benefits and taxed accordingly); or,
- Cash out all/part of their pension or the death benefit so that they receive it in their personal name (and then pay tax at marginal rates).
The above highlights that it's important to be aware of what the imminent changes in the super law could mean to your estate planning objectives and strategies. People still have time to explore their options in response to the changes, which may or may not involve directing all or part of their death benefits (which would otherwise have been paid as a pension) to their estate and perhaps to a superannuation death benefits proceeds trust.
Like in anything, there is no 'one size fits all' in estate planning. In order to ensure that a person's needs are effectively tailored to their personal circumstances, a greater degree of collaboration between lawyers, accountants and financial planners will be required. It may otherwise be very difficult to achieve that all important balance between asset protection, tax effectiveness and flexibility.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
