$1.6M Transfer Balance Cap and Death Benefit Pensions: What do you need to check before 1 July 2017?
It is common for a member of a SMSF to be the recipient of a death benefit pension as a result of being a dependant beneficiary of a deceased member.
The ATO has confirmed in a draft guide that the value of the superannuation interest supporting the death benefit pension will count towards the recipient’s $1.6M transfer balance cap.
In certain cases, this could result in the surviving member exceeding their transfer balance cap.
It is important to note that a death benefit pension cannot be commuted back to accumulation phase. If the pension is commuted, it must be paid out of the SMSF.
The following two examples highlight potential solutions and pitfalls arising from this problem:
Example A
John is the sole member of a SMSF and is in receipt of an account based pension with a value of $1M and is also the recipient of a death benefit pension with a value of $1.4M.
A solution for John may be to keep the death benefit pension in retirement phase and then keep $200,000 of his account based pension in retirement phase and commute $800,000 back to accumulation. This option allows John to keep the entire value of his superannuation interest within the super environment, albeit partially moving a portion out of retirement phase.
Example B
In this case John has $1M supporting an account based pension and $2M value in a death benefit pension.
John has a problem as leaving the full value of the death benefit pension in retirement phase will result in an excess transfer balance. He cannot commute $400,000 back to accumulation.
The solution would be for John to commute his $1M account based pension back to accumulation, keep $1.6M of the death benefit pension in retirement phase and commute and pay out the balance of $400,000 as a lump sum. This would allow John to keep $2.6M in the super environment.
The lump sum payment may need to be paid out prior to 30 June 2017 to avoid any potential excess balance issues.
Needing to pay out a large lump sum from the SMSF prior to 30 June 2017 would take careful planning and may have flow on effect such as problems with selling illiquid assets and estate planning considerations.
We recommend reviewing the circumstances of your high net wealth SMSF members and seek specific advice where they may be affected.
We would also welcome your call to discuss specific situations and where appropriate we can provide you with detailed advice.
As always I am happy to answer your questions about this or any issues you may have. Just contact me here.