The introduction of the transfer cap will mean that any amounts which exceed the $1.6 million cap in a person’s superannuation account will need to be commuted back to accumulation or be cashed out. The balance cap is indexed but fixed for life: it can grow but you will not be able to top it up if it drops in value. The partners’ combined superannuation amounts will be important. A surviving partner’s reversionary pension from deceased partner’s superannuation fund will count towards the transfer cap. If the partners’ combined superannuation amounts are over $1.6 million, then on the death of one partner, the surviving partner will need to remove any excess value above the cap from the superfund and pay out a lump sum benefit.
Generally, the deceased member’s benefit has to be paid as soon as practicable following death. Therefore, if there are transfer balance cap problems, the surviving partner’s choices will be:
- Take the death benefit (all or part) as a lump sum so the pension limits are met.
- Commute and take the person’s own pension (all or part) as a lump sum (if meet the conditions of release allowing the benefits to be paid).
- Roll back the surviving partner’s own pension (all or part) into accumulation phase. Generally, income generated on superannuation assets supporting a pension is tax free, while income generated on assets in the accumulation phase is taxed at 15%. The ability to roll back is not available for the death benefit because it must be paid as soon as practicable. As death triggers a compulsory payment situation, the surviving partner cannot transfer any of the deceased’s superannuation to their accumulation account.
Child dependents must be under the age of 25 to receive their parent’s death benefit pension. Once they reach 25 they must commute the pension and cash out the money. If the child suffers a permanent disability then they will not be required to cash out the pension and can continue receiving it until the money runs out.
If you would like more information about your estate planning or changes to the superannuation rules, please contact Lennon Mazzeo to discuss on (03) 9670 5999.