Inheriting deceased member benefits within the current pension cap rules
On the 1st of July 2017, the government introduced a $1.6m cap on the total amount that can be transferred into a tax- free retirement phase for pensions. This is known as the Transfer Balance Cap or TBC). This means that most members can only convert $1.6m to a retirement phase pension over their lifetime. Other than pensions which are reversionary on death, death benefits would be required to be paid out of the super fund as a lump sum to an eligible beneficiary or rolled into another fund (or a combination); however, the new fund would need to commence a death benefit income stream. A death benefit payment cannot be retained in the accumulation phase.
Depending on whether there are death benefit nominations in place the death benefits can only be paid either to dependents of the deceased member or the estate of the deceased.
The benefit can only be paid as either a:
- lump sums (maximum of two: an interim and final lump sum),
- pension or pensions in retirement phase, or
- combination of both.
The new rules also included provisions that ensure individuals who inherited their spouse’s superannuation as a pension would have this amount counted towards their $1.6m cap. If the spouse’s pension is reversionary there are also additional rules when it comes to TBC.
Taking a lump sum
The beneficiary can elect to receive the death benefit as a lump sum. If the beneficiary is a spouse and under the age of 65, the beneficiary can consider whether they can contribute this amount to the superannuation fund. From a technical perspective:
- The beneficiary can contribute up to $300,000 using the non-concessional bring-forward provision depending on the balance pending that the bring-forward provision was not utilised in previous years.
- If the superannuation balance exceeds $1,6m or is close to this limit the beneficiary may not be eligible to utilise the full bring forward provision or may not be able to make any non-concessional contributions.
- If the beneficiary is eligible to make contributions, the contributed amount will be preserved until a condition of release has been met.
Commencing a death benefit income stream
The beneficiary can elect to use the death benefit proceeds to commence a death benefit income stream. This option is only available to qualifying dependent beneficiaries as defined under superannuation law. If the beneficiary is a spouse, they have the ability to commence a death income stream. The amount which can be taken as an income stream depends on the beneficiary’s available transfer balance. In a situation where there is an existing income stream, the beneficiary will have an option to start a partial death benefit income stream and to take a partial lump-sum or partially commuting the existing income stream and starting a full death benefit income stream.
If the pension was reversionary to the spouse, the pension will immediately continue to the spouse upon the member's death. The minimum pension amount will be calculated based on the deceased members’ age and the month that the member was still alive. If the beneficiary has an existing death benefit income stream, the amounts will not be checked against the TBC for the deceased member's pension until the anniversary of death. This means that the beneficiary can continue running multiple pensions for 12 months.
The beneficiary will need to report via a Transfer Balance Account Reporting (TBAR) form to the ATO that a pension has been inherited. If the inherited pension balance is going to exceed $1.6m the member would need to roll back into accumulation (either partially or fully) one of their existing pensions within 12 months to ensure that the cap is not breached. The member will not be able to roll back to accumulation the inherited pension as the pension inherited was a reversionary pension.