There are more thresholds, caps and restrictions to manage than ever before when it comes to superannuation and Self-Managed Super Funds and more complexity lies ahead.
From 1 July 2021 the current transfer balance cap (TBC) will change from $1.6 million to $1.7 million. The TBC limits how much money can be transferred from the accumulation phase to the retirement pension phase, where investment returns are tax-free. For this reason, it is important to seek advice on how to set up and manage your super account to maximise retirement income and protect your long-term wealth.
Why does it matter?
- The new $1.7 million transfer balance cap increases the amount you can move into the tax-free pension environment.
- Exceeding the transfer balance cap can trigger penalties and tax liabilities.
- There are implications for estate planning, so it is important that death and reversionary nominations are optimally structured and kept up to date.
- How life insurance benefits are treated differs depending on how nominations are set up and whether the super account of the deceased is in the accumulation or pension phase.
- If you receive a death benefit pension as a beneficiary, you must be careful not to exceed your individual transfer balance cap.
- It determines how much you can contribute into superannuation, as a non-concessional contribution.
Estate planning implications
Upon the death of a super fund member, the law stipulates that their super balance must be paid out as soon practicable, but often it's in the best interest of loved ones not to be rushed. You can buy more time by setting up a reversionary nomination when you move into the pension phase.
This generally takes precedence over a death benefit nomination (notwithstanding what the Superannuation Trust Deed states) and your estate will have 12 months to make a decision about what to do with the super balance, potentially keeping it safely held in a tax-free pension account for longer.
This approach gives those managing your estate time to work through the grieving period and make the best long-term investment decisions. Alternatively, if you only have a death benefit nomination, a trustee may have discretion over what happens with the money, which could then leave the superannuation environment.
On 1 July 2020, Terrence’s $1.7m superannuation benefits consisted of a $1.6m Account-Based Pension (ABP) and $100,000 accumulation balance. Sadly, Terrence passes away, prompting his wife Darla to make some decisions regarding his superannuation.
With Terrence’s passing, his accumulation balance ($100,000) must leave the superannuation environment and be paid to Darla, his death benefit nominee. These funds have to be directed into her personal name. Darla already has an ABP valued at $700,000. Darla has to decide which one of the following options is right for her:
- Retain her ABP and have Terrence’s ABP paid as cash into her personal name; or
- Commute her ABP back to accumulation and then receive a death benefit pension from Terrence’s ABP.
Under the first option, by having Terrence’s ABP paid out as cash into Darla’s personal name, any earnings on these funds would be taxed at her personal marginal tax rate. Assuming an income rate of 4% on the funds, Darla could receive $68,000 worth of income per annum, paying approximately $13,000 in tax. This assumes Darla has no other assets in her personal name.
Compared to the second option, the amount of tax paid depends on the amount held in accumulation and pension. The taxation rates on earnings within the accumulation phase are up to 15%, and within the pension phase are tax-free. With Darla’s $700,0000 being commuted back into accumulation, and assuming the same income return of 4%, $4,200 of income tax would be paid.
No income tax is paid on the $1.6m within the pension phase. Assuming Darla has Terrence’s accumulation benefit of $100,000 held in her personal name, $4,000 of income would be received. As this is under the $18,200 tax-free threshold, no personal income tax is payable. While this is a simple example, compared to the first option, Darla is saving approximately $8,800 p.a. in tax, within the first year alone.
This case study highlights some of the complexity involved in managing decisions related to superannuation in the estate planning process and the importance of getting good financial advice when moving to the pension phase in retirement. If you have any questions about how changes to the balance transfer cap may impact you personally, please contact your FMD Adviser.
Look out for an invitation to our upcoming webinar on this topic.
We'll explore a range of scenarios related to superannuation and estate planning to ensure the optimal transfer of wealth.
General advice disclaimer: This article has been prepared by FMD Financial and is intended to be a general overview of the subject matter. The information in this article is not intended to be comprehensive and should not be relied upon as such. In preparing this article we have not taken into account the individual objectives or circumstances of any person. Legal, financial and other professional advice should be sought prior to applying the information contained on this article to particular circumstances. FMD Financial, its officers and employees will not be liable for any loss or damage sustained by any person acting in reliance on the information contained on this article. FMD Group Pty Ltd ABN 99 103 115 591 trading as FMD Financial is a Corporate Authorised Representative of FMD Advisory Services Pty Ltd AFSL 232977. The FMD advisers are Authorised Representatives of FMD Advisory Services Pty Ltd AFSL 232977.