Retirement, Strategy, Superannuation

Impact of death on total super balance

The 1 July 2017 super reforms introduced yet another new term to the super lexicon – total superannuation balance (TSB). This is more or less defined as everything (accumulation accounts, pensions, defined benefits) an individual has in the superannuation system at a particular point in time across all of their super funds.

With all the focus on transfer balance accounts (TBA) – the running tally of all the amounts an individual has converted to retirement-phase pensions – it has been easy to forget how critically important TSB is when it comes to contributions.

Perhaps most importantly:

  • an individual with a TSB of $1.6 million or more on 30 June is unable to make non-concessional contributions in the following financial year without breaching the relevant contribution cap,
  • an individual with a TSB of less than $1.4 million on 30 June is able to make non-concessional contributions in the following financial year without breaching the cap and can even (providing all the other eligibility criteria are met) bring forward the next two years’ $100,000 a year non-concessional contribution limits (that is, a total contribution of up to $300,000), and
  • while those with TSBs in between these two thresholds at 30 June are able to make non-concessional contributions within their contribution cap in the following financial year, but have a scaled-back ability to bring forward future years’ non-concessional contribution limits.

For clients still making contributions, therefore, it is vital to understand the workings of the TSB.

One interesting scenario that is only just starting to emerge is how an individual’s TSB is affected if they inherit super from someone else.

The classic case here is a reversionary pension.

Let’s say Jane had a TSB of $1.2 million at 30 June 2018. On 31 December 2018, her husband dies and she inherits his $1.6 million retirement pension as a reversionary pension. When will this affect her TSB and when will it affect her ability to contribute?

The answer is simple but easy to misunderstand because it is quite different to the concept we have focused on for the past 12 months – the transfer balance cap (TBC) and the associated TBA.

When will Jane’s husband’s pension count towards her TSB?

Jane’s husband’s pension will count towards her TSB immediately (31 December 2018). This is because this balance immediately ‘belongs’ to Jane – it was a reversionary pension and becomes hers as soon as her husband died. The situation would be quite different if the pension had not been reversionary. In that case, it would not have counted towards Jane’s TSB unless the trustee decided to pay it to her as a pension. Then, it would count immediately that new pension started.

So Jane’s TSB will immediately increase from $1.2 million to $2.8 million on 31 December 2018.

This is quite different to Jane’s TBA.

Remember that reversionary pensions are not added to the survivor’s TBA until 12 months after death (and the amount added is the value of the pension at death). This is why Jane has 12 months to reorganise her affairs so she doesn’t create an excess when it comes to her retirement-phase pensions and the TBC. But it doesn’t change the fact this reversionary pension is part of her TSB immediately. Conceptually this makes sense – as soon as her husband’s pension reverts to her, Jane is entitled to pension payments, any commutations she makes from that pension are reported against her TBA, she can stop the pension (although she can no longer roll it back to accumulation phase indefinitely) and she can transfer it to another fund. It is hers in every sense of the word and so it is unsurprising it should form part of her TSB immediately.

But when will this affect Jane’s ability to make non-concessional contributions?

This is where it becomes important to understand ‘when it matters’ that the reversionary pension is now part of Jane’s TSB.

The non-concessional contributions cap in a particular financial year is set based on the individual’s TSB at the previous 30 June. In Jane’s case, her contributions cap for 2018/19 is driven by her TSB at 30 June 2018 ($1.2 million). Even though her husband’s pension is now hers, there is no requirement to go back and adjust Jane’s TSB.

This means she is able to make contributions in 2018/19 exactly as if she had not inherited the pension. If she would normally have been able to use the bring-forward mechanism to contribute three years’ worth of non-concessional contributions in 2018/19, she can continue to do that.

Where things change for Jane is 2019/20. Unless she has cashed out a large amount from either her own super or her husband’s reversionary pension, her TSB is likely to be well over $1.6 million at 30 June 2019. That will rule her out of non-concessional contributions in 2019/20 (and possibly every year after that as well).

If the pension from Jane’s husband had been non-reversionary, remember it would not count towards her TSB until the trustee decided to convert his balance to a new pension for Jane. If this happened in 2018/19, it would be added to her TSB at that time and would affect her ability to make contributions in 2019/20. If the new pension did not start until 1 July 2019, it would not affect her ability to make non-concessional contributions until 2020/21. If the pension balance was simply cashed out and paid to Jane or another beneficiary (rather than being converted to a pension for Jane), it would never count towards her TSB.

Why is this useful to know?

The death of a spouse is exactly the time when an individual may want to make contributions.

This would be particularly true for Jane if her husband had an accumulation balance. Since this amount will almost certainly have to be cashed out of super, she might choose to take the benefit in 2018/19 while she is still able to put it back into the fund as a non-concessional contribution.

It is also worth understanding the difference between reversionary and non-reversionary pensions in this context. Deferring the commencement of a new pension (only possible if her husband’s pension had not been reversionary) to 1 July 2019 would protect Jane’s ability to make contributions in both 2018/19 and 2019/20.

Perhaps most importantly, it’s worth bearing in mind the traditional thinking along the lines of “I don’t need to worry about a reversionary pension’s impact on the survivor’s super for 12 months” is only applicable for the TBC, not the TSB.

Meg Heffron is director at Heffron SMSF Solutions.

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