If you're a retiree with significant superannuation savings, there is now less than four months to organise your super so it provides you with the most tax-effective benefits under the government's new super reforms.
Included in such arrangements are strategies where super is structured to deliver the best possible estate-planning outcomes.
Now estate planning is the process of arranging during your lifetime how your assets will be efficiently distributed on your death to your beneficiaries.
Where the asset is a superannuation pension, engaging in some advance planning can be very useful and even essential because strategies can be tailored to suit particular circumstances.
Given the significant tax advantages offered by account-based pensions — perks that are set to be restricted under the Coalition's super reforms — it should be no surprise that most retirees, where possible, hold the vast majority of their super in pensions.
It's likely to be a problem if this is the case and their total super in pensions exceeds $1.6 million, says Michael Hallinan, a special counsel with self-managed super fund advisory service SUPERCentral.
Requirements such as having to commute part of any tax-free pension that exceeds $1.6 million to a taxable accumulation account will lead to situations where the commuted portions will no longer form part of any automatic transfer under a reversionary pension. The same could apply under a binding death benefit nomination – for example where the nomination names the particular pension interest.
Under current super entitlements, it is very important to make sure that any benefits that remain on the death of a retiree are passed on in a tax-effective way to any intended beneficiaries.
At the moment you can pass on an account-based pension as a reversionary pension to a partner or spouse, a binding death benefit nomination to specific beneficiaries or a nomination to an estate where it will be distributed in accordance with a will.
The main advantage of a reversionary pension is the guarantee the benefit will pass on to a spouse. They are simple to set up and will remain valid until your passing or the passing of your spouse.
Where things will get complicated after July 1 is where the reversionary pension when added to a spouse's pension exceeds $1.6 million (or whatever happens to be the future value of the pension transfer balance in a retirement phase account when the reversionary pension is inherited). Retirement phase pensions must not exceed $1.6 million from July 1 but can grow through investment earnings without any restrictions.
But when you inherit a reversionary pension there are special rules that apply, says Hallinan. One is a 12-month period to think carefully about any estate planning considerations.
One choice is whether to use the reversionary pension as a way of adding to your concessionally taxed super.
Say you happen to have a retirement phase account balance that has grown to $2 million when you inherit your spouse's $2.5 million reversionary pension.
While the new super rules with their retirement phase cap will require you to "keep or cash in" the reversionary pension, where you choose to keep it they also offer some flexibility in terms of your own pension.
The rules allow you to commute your own retirement pension and roll the proceeds back to an accumulation account where any future investment earnings will be taxed, albeit concessionally.
This action will create what is described as "cap space" in your retirement phase account which the reversionary pension could use.
But as the cap space is $2 million and the reversionary pension is worth $2.5 million, the $500,000 difference must be cashed out. It can't be retained in super.
All this must happen within the 12 months after the pension is inherited.
The treatment of reversionary pensions contrasts with that of binding death benefit nominations. The latter can still go to a spouse or a de facto, any children (regardless of their age or whether they are financially dependent) as well as someone with whom you hold an inter-dependant relationship where you each provide the other with financial and domestic support.
A binding death benefit nomination can also be directed to a "legal personal representative" that will see the super paid into your estate and distributed in accordance with your will.
Where the death benefit is paid to anyone who is not a financial dependant, it must be paid as lump sum – such as the legal personal representative or independent adult children.
An example of this is illustrated by a reader who has two self-managed super funds: one that consists of entirely non-concessional contributions and the other of mainly tax-concessional contributions.
Both funds have balances greater than $1.6 million and as she is over 60, she has started pensions in each.
She knows that from July 1 she will be restricted to only one pension worth $1.6 million. So she asks which fund she should use as her pension account: the non concessional SMSF or the concessional SMSF? And why? She has two financially independent adult children.
Financial planner Nerida Cole of SMSF specialists Dixon Advisory says she is better off retaining the non-concessional SMSF in the pension phase. The excess over $1.6 million can be either taken as a benefit or transferred to her other fund.
Why the Why up to $1.6 million of her non-concessional SMSF? Because the pension amounts in this fund as well as any investment income will be classified as tax-free amounts when it is inherited by anyone, including her adult children.
When it comes to the super in her accumulation account that is sourced from tax-concessional contributions, any death benefit payments to her adult children will be taxed at 17 per cent.
Any comments to John.Wasiliev@fairfaxmedia.com.au
AFR Contributor
