16/04/2018 by Pascoe Partners Accountants
With the dust settling on the government’s recent changes to superannuation, it’s time to look at some of the major implications of the new 1.6m pension cap on estate planning.
We cover what the new cap means, what happens when you exceed the cap, and how you can minimise any negative impact on your pension finances…
The new law requires that a member only have a ‘retirement phase interest’ (new terminology yet again for pensions) of $1.6 million across all super platforms.
Accountants and financial planners across the country have been scrambling to enact the necessary resolutions to make sure that pension balances are cropped down to the necessary limit; and leaving the excess non-pension balance in accumulation or paying it out of the super system altogether.
When you exceed the limit due to an unforeseen event such as the death of your spouse, what happens?
For instance, if you and your spouse both have $1.6 million in pension, when one of you passes away (if the pension is correctly setup to revert to the surviving spouse upon death) then the remaining partner suddenly has $3.2 million of pension balance, breaching the cap.
There is a concession for such ‘reversionary’ pensions. This extends the time limit to adjust the pension balance back to $1.6 million to 12 months from death.
But what if the pensions aren’t set up to automatically revert (i.e. continue to pay) to the surviving spouse?
No such extension exists, unfortunately. You will fall automatically foul of the new rules if you start new pensions to pay your spouse’s balance.
So, an important to-do item is to make sure that your pensions are set up to be ‘reversionary’.
Let’s assume your advisor is up to speed and, upon your spouse’s death, you have an extra 12 months to deal with the pension balance excess.
What should you do next in terms of estate planning?
Unfortunately, the sting in the tail of the government’s new rules is that, for those that die after 1st July 2017, any amount of pension that the deceased has that doesn’t revert or form a new pension must be cashed out of the super system entirely.
Where that balance is represented by substantial farm holdings, that can spell disaster.
Say that Ken and Marge have a self-managed super fund with $5 million of assets represented by $4 million of farming land and $1million of cash and term deposits.
They both have $2.5million in account-based pensions, which are set to revert (i.e. pay to each other) to ensure a continued income stream to the surviving partner.
On the 1st of May 2018, Ken dies, Marge now has $5 million of pensions in her name and 12 months’ leeway to sort the excess $3.4 million of pension balance out.
If Marge stops Ken’s reversionary pension, she would need to cash out $2.5 million from a fund that only has $1 million of liquid assets!
If Marge’s pensions are stopped while she is alive, and she continues $1.6 million of Ken’s reversionary pension, this leaves only $900,000 to be cashed out of super.
The point to note here is to make sure you revise your estate plan to match the new rules.
Need help deciding on the best course of action? Contact us here.