The Transfer Balance Cap & Death Benefits. Nicholas Ali Super Concepts

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1 The Transfer Balance Cap & Death Benefits Nicholas Ali Super Concepts

2 Estate Planning and the TBC March 2018 What you need to know This content of this presentation has been prepared to provide you with general information only. It is not intended to take the place of professional advice and you should not take action on specific issues in reliance on this information. In preparing this information, we did not take into account the investment objectives, financial situation or particular needs of any particular person. Before making an investment decision, you need to consider (with or without the assistance of an adviser) whether this information is appropriate to your needs, objectives and circumstances. You should obtain a copy of the relevant Product Disclosure Statement (PDS) before making a decision to invest in any financial product. Any advice in this presentation is provided by SMSF Administration Solutions Pty Ltd, ACN , AFSL No which is part of the AMP group of companies.

3 The Transfer Balance Cap and death benefits Transfer Balance Cap (TBC) Caps the value of pensions a person can transfer to retirement phase This will limit the person s super fund investment earnings in retirement phase that are exempt from tax From 1 July 2017 the TBC is $1.6m which is indexed in increments of $100k.

4 Transfer Balance Account (TBA) Decrease (-) Commutation of capital value of the pension Structured settlement value Family Law payment splits Losses due to fraud or bankruptcy Increase (+) Value of all pension accounts as at 30 June 2017 Commencement value of new pensions Value of reversionary pension at time individual becomes entitle to them Value of death benefit pensions at the time of commencement Notional earnings that accrue on excess Pension payments, investment gains & losses do not give rise to debits or credits. Government will review the impact of the transfer balance cap amendments if there is a macroeconomics shock that substantially affects retirement incomes. Transfer Balance Account (TBA) Decrease (-) Increase (+) Value of all pension accounts as at 30 June 2017 Commencement value of new pensions Account based pensions Market value Lifetime pensions Annual entitlement x 16 Term pensions Annual entitlement x remaining term (rounded to the nearest whole number)

5 Transfer balance account (TBA) Decrease (-) Increase (+) Value at start time (date of death) credited 12 months later. Value of reversionary pension at time individual becomes entitled Value of death benefit pensions at the time of commencement Value at start time (date pension commences). Transfer balance account (TBA) Debits (-) Credits (+) Commutation of capital value of the pension Commutation of death benefit pensions or other pensions will decrease the transfer balance account. Pension payments, investment gains & losses do not increase or decrease the transfer balance account

6 Pre-death Estate Planning Case study 1 - Roger Roger age 70 is a widower He has two children, Mark age 45 and Susie age 40 He works for Mark in his business for a few weeks at Christmas.

7 Case study 1 - Roger On 1 July 2017 he is receiving a pension valued at $1.6 million and has $900,000 in accumulation phase The pension has a 60% tax free amount and on 1 July 2017 the accumulation balance has a $100k tax free component What could Roger do from an estate planning perspective? Case Study 1 - Roger Strategy 1 Roger could leave his superannuation alone and the income in accumulation phase would be taxed at 15% On his death the children pay lump sum tax on 40% of the pension balance at 15% plus Medicare Levy And 15% tax (plus Medicare Levy) on the accumulation component (less the $100k tax free component).

8 Case Study 1 - Roger Strategy 2 Roger could withdraw the accumulation balance and gift some or all of it to his family and invest any that is left over On his death have a BDBN to his estate The estate would pay lump sum tax on 40% of the pension balance The tax would be 15% on the taxable amount. Using the TBC

9 Case Study Jenny and Robert Jenny Has a pension valued at $1.9 million on 1 July 2019 Value for transfer balance cap purposes is $1.6 million She has $2 million in accumulation phase. Case Study Jenny and Robert Robert Has a pension valued at $1.8 million on 1 July 2019 Value for transfer balance cap purposes is $1.6 million He has $1 million in accumulation phase.

10 Case Study Jenny and Robert Jenny s Balance TBA in 2019 DATE TRANSACTION DEBITS CREDITS 1/7/2017 Pension 1/07/2017 TRANSFER BALANCE ACCOUNT MEMBER PENSION BALANCE 1 July 2019 $1,600,000 $1,600,000 $1,900,000 1/7/2019 Accumulation phase (not counted for TBA purposes) - $2,000,000 Robert s Balance TBA in 2019 DATE TRANSACTION DEBITS CREDITS 1/7/2017 Pension 1/07/2017 TRANSFER BALANCE ACCOUNT MEMBER PENSION BALANCE 1 July 2019 $1,600,000 $1,600,000 $1,800,000 1/7/2019 Accumulation phase (not counted for TBA purposes) - $1,000,000 Case Study Jenny and Robert Robert dies on 1 July 2019 Jenny becomes entitled to an automatic reversionary pension from Robert What could she do?

11 Case Study Jenny and Robert Strategy 1 Jenny could keep her superannuation Withdraw Robert s death benefit as a lump sum Her balance in superannuation would be $3.9 million Pension balance would be $1.9 million and accumulation balance would be $2 million. Case Study Jenny and Robert Jenny s Balance TBA in 2019 DATE TRANSACTION DEBITS CREDITS 1/7/2017 Pension 1/07/2017 TRANSFER BALANCE ACCOUNT MEMBER PENSION BALANCE 1 July 2019 $1,600,000 $1,600,000 $1,900,000 1/7/2019 Accumulation phase (not counted for TBA purposes) - $2,000,000 Jenny withdraws Robert s death benefit of $2.8 million as a lump sum

12 Case Study Jenny and Robert Strategy 1 However we have $2.8m leaving the super system Now income and realised gains taxed at Jenny s MTR If MTR >15%, not a great outcome How could Jenny retain the maximum amount in super? Case Study Jenny and Robert Strategy 2 Jenny could commute her pension and transfer it to accumulation phase She could then receive the $1.8 million reversionary pension, commence a death benefit pension with $100k and withdraw the remainder ($900k) as a lump sum Her balance in super would be: Accumulation phase $3.9 million Reversionary pension $1.8 million.

13 Case Study Jenny and Robert Jenny s Balance TBA in 2019 DATE TRANSACTION DEBITS CREDITS 1/7/2017 1/7/2019 1/7/2020 1/7/2020 Pension 1/07/2017 Commutation of pension Pension 1 July 2019 (Robert s reversionary pension) New account based death benefit pension TRANSFER BALANCE ACCOUNT MEMBER PENSION BALANCE 1 July 2019 $1,600,000 $1,600,000 $1,900,000 $1,900,000 -$300,000 0 $1,800,000 $1,500,000 $1,800,000 $100,000 $1,600,000 $1,900,000 1/7/2019 Accumulation phase (not counted for TBA purposes) - $3,900,000 Jenny withdraws a lump sum of $900k which is Robert s remaining death benefit ($2.8m - $1.9m) Case Study Jenny and Robert Strategy 2 Jenny would not be required to make a decision about Robert s reversionary pension until 12 months after his death Credit in recipient s TBA arises 12 months after date of death with value of entitlement as at date of death but only if automatic reversion Lump sum death benefits don t count against the recipient s TBC.

14 Case Study Jenny and Robert Strategy 2 The leakage from the super system is now $900k Cannot retain all of Robert s benefit in super But $900k taxed at MTR could be managed Could even pay no tax on income or realised gains. Death benefit strategies Death benefit pension exceeds the recipient s TBC: 1. Commute the reversionary pension to a lump sum or part lump sum and withdraw from super 2. Continue with the reversionary pension and commute and withdraw other pensions 3. Continue with the reversionary pension and commute and transfer back other pensions to the accumulation phase. Not possible to transfer back excess amount of reversionary pension to the accumulation phase death benefit must either be paid as a lump sum or pension (SIS Reg 6.21(2)).

15 Review other strategies Consistency of Binding Death Benefit Nominations Withdraw lump sums from the fund and gift to children where there are taxable components Withdraw lump sums and transfer amounts to other entities or hold amounts personally to be invested depending on tax outcomes Review Wills to ensure consistency with the strategies implemented. Questions