Whilst a morbid subject, recent superannuation changes mean that people who have a substantial superannuation benefit need to understand how this asset could be distributed on death to ensure family assets pass to those they intend to bequeath.
This article hopefully provides some food for thought in regards to superannuation death benefits.
So, let’s start with the basics. When a death benefit is paid from superannuation, whether it be from accumulation or pension phase, it must be received as a lump sum or a death benefit income stream to an eligible beneficiary.
Before 1 July 2017, when an eligible person received a death benefit pension, they could commute the pension and roll the benefit back to accumulation if outside the prescribed period, generally the later of:
- Three months from grant of probate, or
- Six months from date of death.
From 1 July 2017, if the death benefit is taken as an income stream, it cannot be commuted and rolled back to accumulation at any stage. It can be commuted and rolled over to another fund to commence another death benefit pension, however.
Before 1 July 2017, only a spouse could rollover a death benefit to another fund but from 1 July 2017, all death benefit income stream beneficiaries are able to roll over from one superannuation fund to another.
If a death benefit is rolled over and received in another super fund, the tax treatment for the beneficiary will not change. This change will provide a significant benefit to clients who hold insurance within super funds which do not pay death benefit income streams. Once the death benefit is rolled over to the new fund it must be immediately taken as an income stream or a lump sum and cannot be held in accumulation phase.
Transfer Balance Cap (TBC)
From 1 July 2017, there will be a transfer balance cap (TBC) which limits how much money a person can hold in retirement phase. In summary, this means that clients will not be able to commence superannuation income streams with more than $1.6 million. The TBC will also apply to recipients of death benefit pensions.
A death benefit pension may be payable to a:
- Spouse (including de facto and same sex)
- Person who was financially dependent on the deceased
- Person who had an interdependency relationship with the deceased person, and
- Child (including adopted, step and ex- nuptial) who is:
- Under 18
- Over 18 with a disability, and
- 18 to 25 and they were financially dependent on the deceased.
Death benefit income streams if paid to a dependant other than a child
Superannuation death benefits received as a pension count towards the receiving beneficiary’s TBC. If a client has a superannuation income stream and therefore, has a TBC and they receive a death benefit pension, the total of their income stream benefits cannot exceed the general TBC amount.
Where the recipient spouse will exceed the TBC upon receiving a death benefit income stream, they can roll their own pension back to accumulation if they want to retain the money in superannuation. Alternatively, they could either receive the death benefit as a lump sum or commute their own pension as a lump sum and then receive the death benefit as an income stream.
Reversionary pensions vs non-reversionary pensions
Non-reversionary death benefit pensions count towards the TBC of the recipient immediately after they use the benefits to commence a death benefit pension. When a reversionary death benefit pension is received, it does not count towards the TBC for twelve months. This provides the death benefit recipient time to work out how they want to receive the death benefit and move some of their own pension account back to accumulation phase if necessary.
After twelve months, the amount received as an income stream counts towards the recipient’s TBC.
Death benefit income streams paid to a child
A death benefit income stream can be received by a child of the deceased as long as the child is:
- Under age 18
- Between 18 and 25 and they were financially dependent on the parent, or
- They have a permanent disability.
The amount which can be paid to an eligible child, without exceeding the child’s TBC depends on whether or not the parent had a TBC or not, which in turn depends on whether or not the parent had already commenced an income stream.
The changes will mean that many clients, in particular those with more than $1.6 million in super, may need to revise how their superannuation death benefits will be paid.
Depending on a client’s circumstances and the amount of money they have in super, clients should review existing arrangements and consider:
- Leaving their death benefit to their spouse and their minor children to keep as much money in the super environment.
- Having a reversionary beneficiary in place instead of a binding death benefit nomination.
- Having some of their death benefit paid out as a lump sum and held in a family trust.
- Either starting an account based pension with their maximum TBC amount before they die so that they can leave as much as possible to their child/ren as death benefit pensions, or
- Leaving all of their superannuation money in accumulation if they have more than one minor child so that each child can receive a death benefit pension up to the general TBC each.