Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 421

Optimal ways to use the Transfer Balance Cap after a death

In 2016, the Turnbull government made major changes to superannuation, which took effect from 1 July 2017. Their aim was to restrict how much you could place in the low tax superannuation environment. The changes included reducing the amount that can be held by retirees in the zero-tax pension mode by introducing a Transfer Balance Cap (TBC) that limited the amount an individual can transfer into their pension fund to $1.6 million.

Four years have passed since then, and thanks to indexation, since 1 July 2021, the new TBC is $1.7 million. If you have already used your $1.6 million TBC, you will be unaffected by the indexation changes but if you have transferred only a portion of your TBC – say, $800,000 – you will be entitled to a proportional increase to the cap based on the unused portion.

But the TBC is not well understood

Many people are under the false impression that it is the maximum you are allowed to hold in the tax-free pension fund. But actually, the TBC is the maximum amount an individual may transfer from accumulation mode to pension mode in their lifetime. When you have transferred up to your TBC, you are not allowed to transfer any new funds into pension mode but the money you hold in pension mode can continue to grow.

Four years have passed since the changes and I regularly receive emails asking what happens when a person with superannuation dies and wishes the balance of their fund to be left to another beneficiary.

Case study on joining two balances

What follows is a case study based on a typical scenario with the names changed for privacy.

Jack and Jill have $3.5 million combined in their SMSF. Jack’s total balance of $2.7 million is comprised of $1.8 million in pension phase (having initially transferred $1.6 million), and $900,000 in accumulation. Jill has $800,000 in pension phase, having previously transferred $700,000 to pension mode.

What would happen on the death of either Jack or Jill? I am indebted to John Perri of AMP technical who worked the numbers for me.

1. If Jack dies first…

The first job is to establish how much pension transfer cap is available to Jill.

By starting an account-based pension with $700,000, Jill has already used 43.75% of her original $1.6 million pension transfer cap. So she had an unused pension transfer cap percentage of 56.25%. This is important because from 1 July 2021, with the pension transfer cap indexing by $100,000 to $1.7 million, Jill was eligible for an extra 56.25% of the $100,000 increase as well, ie, $56,250.

Accordingly, from 1 July 2021, her maximum pension transfer cap is $1,656,250 (ie original $1.6 million plus 56.25% of the $100,000 increase). Given that she has already used up $700,000 of the $1,656,250 pension transfer cap, she therefore has $956,250 available to use.

Let’s assume that both Jack and Jill’s account-based pensions have a binding nomination to each other, and that Jack has died and has nominated Jill to receive all the money he had in super. Jill is considering to receive some of this super death benefit as death benefit income stream but cannot receive all of it as an income stream as it would count towards her pension transfer cap, and clearly exceed it.

The options available to Jill are:

  • Commence a $956,250 death benefit income stream from Jack’s pension and receive the balance of Jack’s super of $1,743,750 as a lump sum, which will need to be cashed out of the superannuation system.
  • Commute her existing pension account of $800,000 which she rolls back into super accumulation. By doing this, the $700,000 amount previously counted against the pension transfer cap when she commenced her original ABP is ‘removed’, effectively permitting her to commence a new income stream with her maximum pension transfer cap of $1,656,250. She then commences a $1,656,250 death benefit income stream from Jack’s ABP and receives the balance of Jack’s super of $1,043,750 as a death benefit lump sum, which will need to be cashed out of the superannuation system.

Under either option, Jill will have fully exhausted her transfer balance cap of $1,656,250. The key difference is the amount Jill will keep in super.

With the first option, she has $1,656,250 in super, all in pension phase, with the rest of Jack’s super withdrawn as a death benefit lump sum.

With the second option, Jill still has $1,656,250 in pension phase. However, by commuting her own pension, she also has $800,000 in accumulation phase. The balance of Jack’s super withdrawn as a death benefit lump sum has also reduced to $1,043,750. This option boosts her super holding by $800,000.

2. If Jill dies first...

First, let’s establish how much pension transfer cap is available to Jack. By starting an account-based pension with $1,600,000, Jack fully used up his $1.6 million pension transfer cap. He therefore has no unused pension transfer cap.

We have assumed Jill has nominated Jack to receive her $800,000 pension balance. However, Jack cannot receive any of Jill’s super as an income stream, as he has already used up all of his pension transfer cap of $1.6 million.

The options available to Jack are as follows:

  • Receive Jill’s superannuation interest of $800,000 as a tax-free death benefit lump sum, which would have to be cashed out of the superannuation system, or
  • Partially commute $800,000 of his superannuation income stream and retain it in the accumulation phase. By doing so, this would free up space under his transfer cap, allowing him to take Jill’s super as death benefit income stream of $800,000.

Using the second option, Jack still has $1.6 million in pension phase, but also has an additional $800,000 in accumulation. By choosing this option, he would not need to cash any of Jill’s superannuation interest out of the superannuation system as a death benefit lump sum.

I appreciate this is complex and advice should be taken before any changes are adopted when a person with a large superannuation balance dies. However, what these examples do is show how choosing a different option could make a huge difference to the outcome.

 

Noel Whittaker is the author of 'Making Money Made Simple' and numerous other books on personal finance. See www.noelwhittaker.com.au for details. He is also a Non-Executive Director of VGI Partners Global Investments (ASX:VG1) and Adjunct Professor at the QUT Business School. This article is general information and does not consider the circumstances of any investor.

 

14 Comments
Claire
September 10, 2021

When determining the unused transfer balance cap, the percentage of 'highest amount used' is rounded down. The unused percentage must be a whole number. Refer to this link on the ATO website: https://www.ato.gov.au/Individuals/Super/In-detail/Withdrawing-and-using-your-super/Indexation-of-Transfer-balance-cap/

Therefore, in this case, Jill's unused portion is 57% ($700,000 / $1,700,000 = 43.75% used, rounded down to 43%, meaning 57% is unused), resulting in indexation of $57,000, giving her a new Personal TBC of $1,657,00, and available space of $957,000 prior to commuting her pension.

If she commutes her pension, she will receive a 'debit' to her transfer balance account of $800,000 (the value of the pension at the time of commutation), giving her the ability to start a new pension of $1,757,000.

Barbara Ryan
August 22, 2021

What happens to the part of super in accumulation mode when 1 person dies?

S T
August 22, 2021

I assume all these scenarios are only for people under 75 years of age? No ability to transfer super to super if over 75 from my understanding.

Brian Hor, Special Counsel, Townsends Lawyers
August 20, 2021

A further option for Jack and Jill is to forgo the amount of the deceased's death benefit which exceeds the survivor's Transfer Balance Cap and allow it to be re-directed to the Estate of the deceased, so that the Will of the deceased can direct that amount into a Testamentary Discretionary Trust for the benefit of the survivor and other family members. This requires that the SMSF has a suitably flexible trust deed, that the deceased had made a tailored "cascading" death benefit nomination, and the Will includes an appropriately worded Testamentary Discretionary Trust. This strategy may be particularly effective if the survivor and their children are tax dependants of the deceased at the time of death, and the Will provides for a Superannuation Proceeds Testamentary Trust to be established.

Liam
August 21, 2021

Great strategy Brian. Strategically filed for future use!

Rob
August 19, 2021

Not quite as I understand as optimum

Step 1 Jill rolls her $800,000 Pension back to Accumulation
Step 2 Jack's $900,000 in Accumulation comes out of Super, all tax free on withdrawal
Step 3 Jack's $1.8m in Pension mode, "reverts" to Jill under the BDM and stays tax free in Pension mode

You're Welcome
August 19, 2021

I'm pretty sure if she commutes her $800,000 pension back to accumulation, she will get a credit of $800,000 back towards her TBC, even though the initial pension starting value was only $700,000, which gives her a TBC of $1,756,250.

John De Ravin
August 19, 2021

I think you're right, you're welcome! Would be good to get confirmation though

Ray
August 20, 2021

My understanding - Jill will get a $800,00 credit back to her transfer balance cap - could we please get some confirmation. If this is not the case, then how would you calculate the new transfer cap if only a partial amount is transferred back to accumulation.

@SMSFCoach
August 21, 2021

You’re Welcome is correct but just needs to be considered a little differently. Jill commuted and rolled back her account based pension of $800k to accumulation phase. This reduced Her TBC to “negative $100,000”. She then can receive Jack’s death benefit account based pension up to $1,756,250. This allows her to stay within her personal TBC of $1,656,250.

John De Ravin
August 22, 2021

Thanks a lot @SMSF Coach for clarifying!

Vince
August 20, 2021

I was under the same impression. She will have a TBC of $1,756,250 to capture the additional $100,000 of investment earnings that was rolled back to accumulation phase.

Manoj Abichandani
August 19, 2021

Noel
Your figures tie up - no problem here - but I would like to add that when making a decision to put out the money out of super should be made with the consideration that income on it outside of super could be tax free.

In your option 1 when Jill dies first - taking out $800,000 out of super and then investing it outside super is being considered along with the Option 2 of commuting own pension and leaving the money in accumulation account. Readers who are not advisors should understand that if income is say 5% on this $800,000 or $40,000 will be taxed at 15% (ignoring cgt income which is taxed at 10%) for every dollar or $6,000 - but if this income is earned out of super - it is possible that there is very little tax if there is no other income outside of super.

For the benefit of users Tax on $40,000 outside of super is $4,142 + $800 Medicare Levy - less low and mid income offset of $955 or $3,887 and Jack could be also eligible for $2,230 Senior tax offset.

In many cases - taking money out may be a better result. As an SMSF auditor, I see wrong advice given all the time and our job as an auditor do not expand to correct advisors mistakes - but as a passing remark - SMSF are free to make comments in their management letter - like in your a case, I would.

Manoj Abichandani SMSF Auditor

Albert
August 27, 2021

Thank you Manoj : Are most upgraded new SMSF trust deeds these days suitably flexible as per Brian Hor below?

Thank you Brian Hor for below:
A further option for Jack and Jill is to forgo the amount of the deceased's death benefit which exceeds the survivor's Transfer Balance Cap and allow it to be re-directed to the Estate of the deceased, so that the Will of the deceased can direct that amount into a Testamentary Discretionary Trust for the benefit of the survivor and other family members. This requires that the SMSF has a suitably flexible trust deed, that the deceased had made a tailored "cascading" death benefit nomination, and the Will includes an appropriately worded Testamentary Discretionary Trust. This strategy may be particularly effective if the survivor and their children are tax dependants of the deceased at the time of death, and the Will provides for a Superannuation Proceeds Testamentary Trust to be established.

 

Leave a Comment:

     

RELATED ARTICLES

Five urban myths about super changes

Is the '4% rule' for retirement broken?

8 hints for any SMSF in both accumulation and pension modes

banner

Most viewed in recent weeks

10 reasons wealthy homeowners shouldn't receive welfare

The RBA Governor says rising house prices are due to "the design of our taxation and social security systems". The OECD says "the prolonged boom in house prices has inflated the wealth of many pensioners without impacting their pension eligibility." What's your view?

Three all-time best tables for every adviser and investor

It's a remarkable statistic. In any year since 1875, if you had invested in the Australian stock index, turned away and come back eight years later, your average return would be 120% with no negative periods.

The looming excess of housing and why prices will fall

Never stand between Australian households and an uncapped government programme with $3 billion in ‘free money’ to build or renovate their homes. But excess supply is coming with an absence of net migration.

Five stocks that have worked well in our portfolios

Picking macro trends is difficult. What may seem logical and compelling one minute may completely change a few months later. There are better rewards from focussing on identifying the best companies at good prices.

Let's make this clear again ... franking credits are fair

Critics of franking credits are missing the main point. The taxable income of shareholders/taxpayers must also include the company tax previously paid to the ATO before the dividend was distributed. It is fair.

Survey responses on pension eligibility for wealthy homeowners

The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?

Latest Updates

Investment strategies

Joe Hockey on the big investment influences on Australia

Former Treasurer Joe Hockey became Australia's Ambassador to the US and he now runs an office in Washington, giving him a unique perspective on geopolitical issues. They have never been so important for investors.

Investment strategies

The tipping point for investing in decarbonisation

Throughout time, transformative technology has changed the course of human history, but it is easy to be lulled into believing new technology will also transform investment returns. Where's the tipping point?

Exchange traded products

The options to gain equity exposure with less risk

Equity investing pays off over long terms but comes with risks in the short term that many people cannot tolerate, especially retirees preserving capital. There are ways to invest in stocks with little downside.

Exchange traded products

8 ways LIC bonus options can benefit investors

Bonus options issued by Listed Investment Companies (LICs) deliver many advantages but there is a potential dilutionary impact if options are exercised well below the share price. This must be factored in.

Retirement

Survey responses on pension eligibility for wealthy homeowners

The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?

Investment strategies

Three demographic themes shaping investments for the future

Focussing on companies that will benefit from slow moving, long duration and highly predictable demographic trends can help investors predict future opportunities. Three main themes stand out.

Fixed interest

It's not high return/risk equities versus low return/risk bonds

High-yield bonds carry more risk than investment grade but they offer higher income returns. An allocation to high-yield bonds in a portfolio - alongside equities and other bonds – is worth considering.

Sponsors

Alliances

© 2021 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.