The introduction of a $1.6 million transfer balance cap for superannuation will take effect from 1 July 2017 which is likely to impact fund members who collectively with their spouse exceed $1.6 million in super.
When an individual with a super account dies, the trustee of the super fund will generally pay the deceased’s remaining super interests (accumulation and retirement phase) as a death benefit lump sum to a beneficiary.
Superannuation death benefits can be cashed:
- to a beneficiary or beneficiaries as superannuation lump sums that are paid out of the super system, or
- to a dependant beneficiary or beneficiaries as superannuation income streams that are retained in the super system, or
- to a dependant beneficiary or beneficiaries using a combination of the two.
A dependant is a person who is either a spouse of the deceased, a child of the deceased (less than 18 years old, financially dependent under 25 years old or has a disability) or a person who was in an interdependency relationship with the deceased.
When a death benefit income stream is paid to a dependant beneficiary, a credit arises in the beneficiaries transfer balance account. This may result in the dependant exceeding their transfer balance cap.
In this case, the beneficiary can choose to reduce their transfer balance account by commuting the death benefit income stream fully or partially. When this occurs, the commuted amount will need to be cashed out as a lump sum and paid to the individual – rather than being kept in an accumulation account, as this contravenes the regulatory requirement to cash the benefit out of the super system as soon as practicable.
Reversionary super income streams
A death benefit can be either reversionary or non-reversionary.
Reversionary death benefit income streams are super income streams that revert to a reversionary beneficiary automatically upon the member’s death. A non-reversionary death benefit income stream is a super income stream created and paid to the dependant beneficiary or beneficiaries.
If an individual receives a reversionary super income stream, the value of the entire supporting super interest at the time it becomes payable to the beneficiary counts towards their transfer balance cap.
If you are the recipient of a reversionary pension, the income stream will not count as a credit in your transfer balance account until 12 months after the death of the member, giving you time to adjust your affairs and reduce any amount that may cause you to exceed your transfer balance cap.