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TBA can create pension payment trap

TBA pension payment

Unreviewed death benefit pension plans may saddle a surviving spouse with funds that could get pushed out of the super system.

SMSF trustees who have chosen to pay a death benefit pension to their partner need to re-examine their transfer balance account (TBA) as payments close to the threshold will trap the surviving partner with money that will be forced outside superannuation.

Cooper Grace Ward partner Scott Hay-Bartlem said couples in an SMSF need to be aware that when they receive a death benefit paid as a pension, it will count as a credit or increase in their TBA and not as a second transfer balance because their spouse has died.

“If a couple are both sitting at $1.6 million for their TBA and one of them dies and the dead person’s benefit is paid as a pension to their spouse, the spouse gets another $1.6 million, which takes them over that threshold and into excess territory,” Hay-Bartlem said during a recent webinar.

He added a death benefit payment has to be paid out and cannot be redirected to another party, and where it cannot be paid as a pension, it has to come out as a lump sum.

“Counterintuitively, if someone dies and their spouse is in pension phase, to optimise and maximise the amount of money sitting in their SMSF, we need to put the one who is alive back into accumulation phase because we can commute a pension back into that phase, and have a TBA debit or reduction in the pension balance and create the ability to take the dead person’s TBA or pension and pay it to the surviving spouse,” he said.

“The short version of all this is that not giving consideration to the TBA and paying a pension to the surviving spouse is a trap because they can get a credit or an increase in their own TBA, and if we can’t pay that pension, it will comes out as a lump sum payment.”

Cooper Grace Ward partner Hayley Mitchell added TBAs should be re-examined as many people may not have reviewed them since their introduction in 2017.

“Revisiting this is probably a good idea because when it was introduced in 2017, we know that a lot of our clients looked at leaving the decision flexible for the surviving spouse so that they could rejig their pension balances and keep the most that they could in the super system,” Mitchell said during the webinar.

“With the excess that came out, they could either choose to pay it to themselves or they might have set up a testamentary trust under the terms of the will.

“For those clients, it’s probably a good idea to consider whether this discretion is still good for them. If they’re in a blended family scenario, for example, discretion could be tricky for the surviving spouse who might be looking at whether there are additional measures they now need to put into place.”

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