SMSF members and advisers looking to minimise the impact of a death benefit on the transfer balance account (TBA) of a surviving spouse should consider if making it a reversionary pension will give more room and time to deal with the extra funds, a technical specialist has suggested.
SuperConcepts SMSF technical and private wealth executive manager Graeme Colley said the upside to receiving a death benefit as a reversionary pension was that it postponed the receipt of the pension by a year, which is useful if it straddles a period in which the transfer balance cap (TBC) is indexed.
“In the year preceding increased indexation we don’t know until February, when the December CPI (consumer price index) indexation figure comes out, whether the general TBC will be indexed,” Colley told attendees of a recent technical webinar.
“Subsequent to that, death benefit pensions, which are reversionary pensions, are not counted against the surviving spouse’s TBC until the first anniversary of the death of the spouse.
“So with the reversionary pension it creates an opportunity where if you know that indexation is coming up, and a client passes away who has got a reversionary pension, then the surviving spouse has got a whole year before the death benefit pension and its value for TBC purposes is counted against their TBA.”
According to Colley, this consideration is important ahead of the start of the next financial year at which the general TBC will increase from $1.7 million to $1.9 million.
“It might be worthwhile to consider for some clients where you can add a reversion onto the current pension they are in receipt of because if the client happens to pass away and the reversion is to a surviving spouse before 30 June, the surviving spouse will get access to a TBA of $1.9 million, rather than the $1.7 million, which would happen where the deceased doesn’t have a reversionary pension,” he suggested.
Conversely, he said once a non-reversionary pension starts to pay benefits from the superannuation fund, it was counted immediately against the individual’s personal TBC.
“If they’ve never taken a pension into superannuation, they will be subject to a limit of $1.7 million, but if it was a reversionary pension, then it’s not until this time next year they need to worry about the TBA and the TBC will have been indexed to $1.9 million,” he said.
“The surviving spouse can then use that $1.9 million as the amount they retain in superannuation or may have the opportunity if the balance of the pension they commence is less than $1.9 million to top it up if they’ve got superannuation that they’re entitled to at some later stage.”