Here we go again….!
Several significant changes to the superannuation rules became effective from 1 July 2017.Do you really need to know about them? Yes, you do!
Not only will the changes impact on your plans for your superannuation and retirement, but they will very likely also impact on your estate planning objectives and arrangements.
Ok, So What Has Changed?
In summary, the new rules after 30 June 2017 in relation to pensions include the following:
1. A person cannot start a pension with an account balance supporting a pension of over $1.6m (or continue such a pension after 30 June 2017).
2. This limit is called a person’s “transfer balance cap”.
3. When a person starts a pension after 30 June 2017, they will have a “transfer balance account”. This will track key events in relation to the person’s pension, to see if the person exceeds their transfer balance cap (either on starting the pension or at a date on starting an additional pension).
4. If someone exceeds their transfer balance cap, they will need to take action to rectify the problem (that is, by commuting part of their pension).
5. If the person does not take action, the Commissioner of Taxation can force the fund to rectify the problem (by issuing a “commutation authority”).
6. The rectification action that can be taken will involve commuting some or all of the pension to a lump sum.
7. Except in relation to pensions resulting from the death of a member, such a commutation can generally be retained in the superannuation system.
What Does This Mean For Me?
What this means in practical terms is that where the death benefit exceeds the recipient’s transfer balance cap (currently set at $1.6 m), then any excess must be cashed out as a lump sum. This will impact in particular on those wishing to keep benefits in superannuation by reverting or paying a pension to their dependants upon their death.
How Will This Affect My Estate Planning Decisions?
There are a number of ways in which these changes may impact on estate planning decisions. For example:
1. It will be necessary to review and possibly update death benefit nominations and Wills;
2. It may be necessary to review and update Self Managed Superannuation Fund Deeds to bring them up to date with the new legislation and to allow estate planning objectives to be achieved. For example, often older Deeds do not allow for non lapsing Binding Death Benefit Nominations;
3. Where members of a superannuation fund have balances exceeding the transfer balance cap, they may need to consider setting up a Self Managed Superannuation Fund for their pension interest and retaining their remaining accumulation interest in their existing fund. However, care will need to be taken as this could trigger tax issues and accordingly appropriate tax advice should be sought to determine the tax implications of each strategy. A good estate planning strategy can sometimes be a disaster from a tax planning perspective; and
4. Where a death benefit is required to be paid as a lump sum this may force the sale of non-liquid assets where there are insufficient liquid assets to satisfy the lump sum. In such a situation a strategy needs to be developed to prevent this occurring.
These are examples of some of the impacts the new superannuation rules will have on estate planning strategies, but in individual circumstances there are likely to be other impacts as well.
Estate planning is not a set-and-forget process. Rather it is an ongoing evolving process, which must necessarily respond to changes in individual personal, financial and other circumstances, as well as to changes in the law.
The changes to the superannuation rules will have far reaching effects for those who hold, or who anticipate holding, significant funds in superannuation. Therefore, for those who are, or might soon be, affected by these changes it becomes critically important to respond and carefully review your estate planning arrangements and strategies. This review may necessarily extend to reviewing business structures and business succession arrangements.
Those who choose to ignore the new superannuation rules and/or who choose not to regularly review their estate planning and business succession arrangements do so at their own peril. They also do so at the peril of their families and loved ones with potentially significant detrimental financial consequences.