Insurance, Pensions

Insurance source may not restrict payout

insurance pension

The proceeds from life insurance cover can be treated as part of a reversionary pension even if the premiums were paid from the accumulation account.

A technical specialist has confirmed in certain circumstances the insurance proceeds paid upon the passing of a member in pension phase will not have to be transferred to the reversionary death benefit recipient’s accumulation account, regardless from which segment of the SMSF the cover premiums were paid.

Accurium head of education Mark Ellem noted this would be the case if the deceased member no longer had an accumulation account upon their death and was at the time entirely in pension phase.

“I’d say there would be an argument that you can allocate [the insurance proceeds] to the reversionary pension account because you’ve used all of the accumulation account from which the insurance premiums were being deducted to commence the [reversionary] pension,” Ellem told attendees at the TechHub webinar he hosted last week.

“If they had only used part of the accumulation account and continued to deduct the insurance premiums from [that] accumulation account, then it would not be reasonable to allocate those insurance proceeds to the reversionary pension account because you’re still deducting the insurance premiums from the accumulation [balance].”

Ellem pointed out the ability to treat the insurance proceeds in this manner would have a twofold advantage for the reversionary pension recipient from a transfer balance cap perspective and a tax perspective.

“Because the insurance proceeds come in after [the pension] reverts, and it’s the value at the date it reverts that counts towards the recipient’s transfer balance cap, it gives rise to the credit 12 months down the track, the insurance proceeds basically don’t get assessed against the reversionary pensioner’s transfer balance cap,” he said.

“[Further], the tax implications are that [the payment from the insurance cover] is a CGT (capital gains tax) event which is disregarded so the proceeds [will not be] assessable to the fund.”

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