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Easier transfer of death benefit pensions

In my previous article, I discussed how a surviving spouse can receive a death benefit pension and how the new Transfer Balance Cap operates. This second article focusses on other features of death benefit pensions.

How is a death benefit pension taxed?

If the deceased or death benefit pension recipient was aged 60 and over, the recipient, for example a surviving spouse, receives the pension tax-free. If the deceased and the death benefit pension recipient were both under age 60, the pension is taxed as follows:

  • Tax-free component of pension - 0% tax.
  • Taxable component of pension – taxed at personal tax rates plus applicable levies such as Medicare less a 15% tax offset.

The 15% tax offset only applies while the pension is classified as a death benefit pension.

Can you transfer a death benefit pension to another fund?

To transfer any pension from one fund to another, you must stop or fully commute the pension back to accumulation phase, rollover the accumulation monies and commence a new pension in the new superannuation fund.

It is not uncommon for a surviving spouse to move their death benefit pension to another superannuation provider. The death benefit pension may be commenced or the pension may revert on death from an SMSF. If the surviving spouse does not wish to continue with the SMSF, they may transfer the pension to another non-SMSF provider. Under the previous rules, the surviving spouse had to wait until the expiration of the ‘death benefit period’ before affecting the transfer to the new superannuation fund, to avoid the nasty tax outcome.

However, even after waiting for the ‘death benefit period’ to pass, once the death benefit pension was transferred to the new fund and a new pension commenced, the new pension will have lost any link to being a death benefit pension. Consequently, if the surviving spouse was under age 60, the taxable component of the pension was assessable, but with no 15% tax offset.

How has the 1 July law change helped?

Prior to the new law starting on 1 July 2017, if a surviving spouse under age 60 elected to receive a lump sum death benefit payment, rather than a pension, they needed to fully commute the death benefit pension to a lump sum within the ‘death benefit period’, otherwise tax may have been levied.

From 1 July 2017, it is possible to roll over death benefit entitlements to other funds without having to wait for the expiration of the ‘death benefit period’. Once the amount has been rolled over it will continue to be recognised as a death benefit superannuation interest and must be used to commence an income stream from the recipient fund or cashed out as a lump sum. This allows a beneficiary to rollover a death benefit pension to a fund of their choice, including a SMSF. It retains the concessional tax treatment associated with a superannuation income stream death benefit (i.e. tax offset equal to 15% of the taxable component for those under age 60).

In effect, the ‘death benefit period’ was abolished from 1 July 2017. No longer will this period need to be taken into consideration when deciding on whether to fully commute a death benefit pension or transfer it to another superannuation fund. In essence, once a death benefit pension, always a death benefit pension. Further, the only way you can cease a death benefit pension is to commute it, either partially or fully and remove it entirely from the superannuation system as a lump sum benefit payment. That is, from 1 July 2017, you cannot commute a death benefit pension back to the accumulation account of the surviving spouse. However, as it will retain its character as a death benefit pension when commuted by a surviving spouse, the lump sum will be received 100% tax-free, no matter how long after the original member’s death or the age of the surviving spouse.

 

Mark Ellem is Executive Manager, SMSF Technical Services at SuperConcepts, a leading provider of innovative SMSF services, training and administration. This article is for general information only and does not consider the circumstances of any individual.


 

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