Death benefits under the new super rules

Death benefit payment rules

Upon the death of a member, a trustee of a complying superannuation fund is required to pay out their death benefit in accordance with the rules contained in the SIS regulations. An individual beneficiary may be entitled to receive a death benefit from the deceased member’s super fund either in the form of:

• A lump-sum cash payment made to the beneficiary outside the superannuation system. These payments can generally be made only to the deceased’s dependents or legal personal representative; or
• As a superannuation income stream (a pension). These payments can be made by the fund only to the deceased’s dependents, for example, a spouse of the deceased, a child of the deceased or to a person in an interdependent relationship with the deceased.

What has changed since 1 July 2017 to death benefit pensions?

Firstly, it is important to understand what a transfer balance cap (TBC) is. The transfer balance cap applies from 1 July 2017. It is a limit on the total amount of superannuation that can be transferred into the retirement phase. The transfer balance cap will start at $1.6 million and will be indexed periodically in $100,000 increments in line with CPI. An individual can continue to make multiple transfers into the retirement phase as long as the individual stays below the TBC limit.

Where a person receives a pension due to the death of their spouse, the value of the pension will count towards their TBC. In effect, from 1 July 2017, the TBC restricts the amount of a deceased member’s benefits that can be retained inside of superannuation and paid to the surviving spouse as a pension or income stream. Prior to the 1 July 2017 changes there was no limit.

Transfer balance cap treatment of death benefit income streams

Where a death benefit income stream is commenced by a beneficiary, or an income stream that reverts automatically to a beneficiary upon death, a credit rises in the beneficiary’s transfer balance account. The timing and value of the credit varies depending on when the death benefit income stream commenced and whether it automatically reverted to the beneficiary.

What happens where death benefit pension credits lead to a transfer balance cap breach?

Where the value of the transfer balance credit due to the death benefit income stream causes the beneficiary to exceed their personal transfer balance cap (currently $1.6m), the excess will need to be cashed out of the superannuation environment. Under SIS Regulation 6.21, where a death benefit income stream commences to be paid, the ongoing requirement for death benefits to remain cashed prevents the death benefit income stream from being rolled back to accumulation phase or to an income stream that is not in the retirement phase.

Are there any options available to work around these issues?

Where payment of a death benefit pension would cause a beneficiary spouse to exceed their transfer balance cap, a couple of solutions exist in order to retain the funds in the concessionally taxed super environment.

1. Commute a beneficiary spouse’s own pension to create room under the spouse’s transfer balance cap

Under this strategy, a member can elect to commute the excess from a retirement phase income stream that is not a death benefit income stream. So, if the receipt of the death benefit pension is likely to result in the beneficiary spouse exceeding their TBC, and they have capital which is funding a retirement phase pension, then the beneficiary spouse should consider commuting the excess funds out of their retirement phase account and into their accumulation account. This means that:

• The beneficiary spouse maximises the balance of their super accounts and any earning on assets supporting these accounts will be taxed concessionally; and
• It minimises the amount which must be paid to the spouse as a death benefit lump-sum outside the superannuation environment.

2. Make current pensions reversionary

A reversionary pension is where a member of a superannuation fund can establish a pension with an automatic reversion of that pension to their spouse, upon their death. Effectively, the pension will continue to the surviving spouse when the original member dies. When this happens the value of the deceased member’s pension at the time of their death will be the amount that is applied to the surviving spouse’s TBC. In contrast, the value of the deceased member’s pension where the pension is non reversionary will be the value of the deceased member’s pension when the death benefit pension is commenced.

• Where the pension is non-reversionary, the timing of credit to the beneficiary spouse’s TBC account is when the death benefit income stream is commenced.
• Where the pension is reversionary, the credit will not be applied against the beneficiary spouse’s TBC until 12 months after the death of the member.

This provides time for the surviving spouse to ascertain whether they have exceeded their TBC, due to the automatic reversion of their deceased spouse’s pension and take appropriate action. The other advantages associated with reversionary pensions are:

• The combined balance of the beneficiary’s retirement phase superannuation will remain in retirement phase, with the benefits of the earnings tax exemption; and
• The benefits do not have to be commuted to an accumulation account nor cashed out of the super system for the 12 months after the date of death.

Depending on the trust deed and original pension contract documents, it may be possible to make non-reversionary pensions, reversionary. The following tables summarise the transfer balance cap assessment of death benefit income streams.

Non-reversionary death benefit income streams

Commencement date	Value	Time of credit to Transfer Balance Cap
Existing prior to 1 July 2017	Value at 30 June 2017	1 July 2017
Commencing on or after 1 July 2017	Commencement value of death benefit income stream	Death benefit income stream commencement date

Reversionary death benefit income stream

Commencement date	Value	Time of credit to Transfer Balance Cap
If reverted prior to 1 July 2016	Value at 30 June 2017	1 July 2017
If reverted between 1 July 2016 and 30 June 2017	Value at 30 June 2017	12 months after date of death
If reverted on or after 1 July 2017	Value at date of death	12 months after date of death

Conclusion

Under the new super reforms, it is evident that individuals and the recipients of death benefits will need to consider several issues when taking a death benefit as a pension income stream and the impact of the death benefits on their transfer balance cap amounts. This leads to a review of estate planning for individuals where their combined superannuation is more than the TBC. The individuals should review their wills, pension documents, death benefit nominations and the fund’s deed to ensure that their estate plan can still be implemented under the new rules.

Please speak to your Bentleys Advisor today if you have any questions about superannuation.

This information is of a general nature only and neither represents nor is intended to be specific advice on any particular matter.  Bentleys (Australia) Pty Ltd strongly suggests that no person should act specifically on the basis of the information contained herein but should seek appropriate professional advice based on their own personal circumstances.  Although we consider the sources for this material reliable, no warranty is given and no liability is accepted for any statement or opinion or for any error or omission.