Opinion piece written by John Maroney, CEO, SMSF Association
Maximising your $1.6 million pension cap may backfire on your beneficiaries.
This can clash with a popular strategy to manage the TBC that involves drawing the legally required minimum pension payments as pension benefits and taking any additional income as multiple lump sum benefits, (called a commutation of the pension).
While the rules surrounding the TBC are complex, generally when a member starts a pension the available limit of $1.6 million of the TBC is reduced by the value of the pension account. Once the amount used to start a pension (or pensions) reduces the TBC to zero, no more pensions can be started.
Splitting payments between pension and lump sum withdrawals may sound like semantics, and to some extent it is.
The benefit of adopting this strategy is that lump sum benefits and pension benefits are treated very differently under the TBC rules.
A lump sum paid from a member’s pension account is, in effect, treated as a removal of capital from the pension account, with the result that the available limit of the member’s TBC is “refreshed” by the amount of the lump sum paid – that is, that amount becomes available to be used to start a new superannuation pension (up to this value) in the future. On the other hand, a pension payment made from the same pension account has no impact on the amount used up against the pension member’s TBC.
While this strategy works well in this context for those funding superannuation pensions from their own superannuation savings, there are problems for death benefit pensions payable after the death of a member, most usually to the surviving spouse of the deceased member.
The problem is that death benefit lump sums are limited to two payments per dependant. This limit would apply to any lump sums paid from a death benefit pension account, including even a lump sum rolled over from the pension account to another superannuation arrangement in order to start a new death benefit pension in that new superannuation fund.
This means that the TBC pension drawdown strategy is not appropriate to apply to death benefit pensions – that is, pensions payable as a consequence of the death of a member of a superannuation fund.
Described as an unintended consequence of the extensive changes that were introduced from July 1, 2017, trustees and administrators need to be aware of the restrictions placed on them when paying death benefits to eligible dependants of a deceased member.
Trustees who ignore these limitations risk breaching superannuation standards and potentially being liable to be fined by the regulator. This is something trustees definitely want to avoid.
This is just another example of the special care that needs to be taken by trustees when paying death benefits. Dependants of the deceased memberare the only individuals entitled to receive those benefits as an allocation of some or all of the deceased member’s superannuation balance. Payments can also be made to the estate of the deceased and allocated to individuals according to their will.
In either case, strict rules apply to these death benefit payments, in addition to the rules that generally apply to members when accessing their own retirement savings. Trustees are the ones responsible for ensuring that the appropriate rules are applied in relation to death benefit payments.
Superannuation law is prescriptive as to whom the death benefits can be paid and the form in which they can be paid, unlike the flexibility that applies to retirement benefit payments paid to a member accessing their own retirement savings.
First, death benefits can only be paid either to dependants of the deceased member or the estate of the deceased.
Second, superannuation law also limits the group of dependants eligible to receive a pension on the death of the deceased member. A spouse is eligible, as is anyone in an interdependent relationship or financially dependent on the deceased at the time of death.
Third, it is very important for trustees to also recognise a further limitation on how they pay death benefits to dependants. This is that the trustees must pay a death benefit as soon as possible after the death and that there are limits to lump sum payments.
It is the limit of a maximum of two death benefit lump sums per dependant that can be inadvertently overlooked by trustees and can be a breach of the standards in the superannuation law for which the trustees can be fined.