Superannuation Death Benefits – Review succession plans

 

On 1 July 2021, the general Transfer Balance Cap (TBC) was indexed for the first time to $1.7 million from the original $1.6 million limit which was first introduced on 1 July 2017. On 1 July 2023, the general TBC was again indexed – this time up to $1.9 million.

 

As a result of this indexation, there is no longer a single cap that applies to all individuals. Instead, every member now has their own personal TBC of somewhere between $1.6 million and $1.9 million, depending on their personal circumstances. So, if you are already in receipt of a pension, it is important to review your personal TBC and seek help if you are unsure how to calculate, or locate, your personal TBC.

 

The TBC not only imposes a limit on the amount of capital that you can transfer to the retirement phase of super, but it also has an impact on what happens to your superannuation when you die. That is, the $1.9 million general TBC also applies to pensions paid to your dependants after you die (called death benefit pensions or reversionary pensions) meaning it can have a significant impact on your estate planning.

 

If you have not updated your Trust Deed since year 2017 when the TBC was first introduced, it is a good idea to upgrade your Trust Deed which covers the new legislation and provisions.

 

When it comes to the TBC, the main issues that you need to plan for in the event of death include:

 

• If your death benefit will be paid as a death benefit pension, your beneficiary’s TBC will be relevant in determining how much can be paid as a pension to them. Any excess death benefit above their TBC must be paid as a lump sum to them.  This limits the amount of money that can be retained within the superannuation environment upon your death.

 

• Where your dependant has already used some of their TBC, you may need to consider strategies which maximise the amount of your benefits that can remain in the SMSF on your death and minimize the amount that would need to be paid to your beneficiaries as a lump sum.

 

• The special rules which delay when the reversionary pension counts towards the new recipient’s TBC and the differences between how reversionary and non-reversionary pensions are counted towards the new recipient’s TBC.

 

• The special rules that operate to modify the TBC of a child in receipt of a death benefit pension to ensure that their personal TBC is not exhausted.

 

• The ability for a recipient of a death benefit pension to rollover the pension to another super fund (note, to satisfy the regulatory rules, a new death benefit pension must be commenced in the new fund or the amount must be withdrawn from the superannuation environment as a lump sum death benefit).

 

Given the potentially significant impact of the TBC with respect to SMSFs and estate planning, we would strongly recommend that trustees have their SMSF trust deed reviewed to ensure maximum flexibility when dealing with excess TBC amounts, rollover of death benefits, reversionary pensions and child pensions. This should be done alongside the review of any binding death benefit nomination(s) you have in place to ensure that they too are valid and provide the certainty in how your death benefits will be dealt with upon your death.

 

The payment and tax treatment of death benefits paid from an SMSF has traditionally been a complex area, with the need to obtain advice from a specialist. Overlayed with the recent indexation of the TBC, the need for specialist advice has never been more important.

 

The above outlines why it is important to keep your trust deed updated.

 

How can we help?

If you would like to talk about how you may be impacted by the changes and the need to update your trust deed, please feel free to contact our SMSF Team, and our Strategic and Technical Superannuation manager, Irene Chau on 02 8404 6700 for assistance.