How the Superannuation changes impact Insurance and Estate Planning strategies
From 1 July 2017, significant changes to superannuation, consequently impact insurance and succession planning strategies which may give rise to the need for reviewing of existing insurance and estate plans.
- Dependents can now choose from which super fund their pension commences by rolling over to their fund of choice.
- Limitations now apply on the ability to receive Life Insurance proceeds as pensions.
Rollover of death benefit
One of the reforms that applies from 1 July 2017 is the ability to rollover a death benefit to another superannuation fund.
Dependants can now choose from which superannuation fund their pension commences, by rolling over to their fund of choice. This allows more flexibility when deciding which superannuation fund to hold insurance in at the outset, as some do not have the capability to pay a pension.
Only dependants who are currently able to receive a pension will be able to roll to another fund in order to commence a pension — there is no change to eligibility. Specifically, this is the deceased’s:
- Child under age 18, age 18–25 and financially dependent, or any age and disabled
- Financial dependant, or
- Someone who was in an interdependency relationship with the deceased just prior to their death.
Whether the pension commences in the fund that insurance is held, or in another fund into which proceeds are rolled, tax may apply to pension payments if the beneficiary is under age 60 when they receive them, and the deceased was under age 60 at their date of death.
Implications of the transfer balance cap
The $1.6 million transfer balance cap, which has applied since 1 July 2017, limits the amount that can be used to commence a pension. This affects death benefit pensions, with different rules applying for discretionary and reversionary death benefit pensions, and child pensions.
Discretionary death benefit pensions
A discretionary (non‐reversionary) death benefit pension may commence when the dependant beneficiary has given specific instructions; or when the trustee is acting on guidance, or a BDBN, provided by the deceased before their death.
Where the trustee commences a death benefit pension that is not a reversionary pension, the commencement value of the pension counts as a credit towards the transfer balance account on the date that the death benefit pension commences.
The commencement value includes any investment earnings accrued to that point, including proceeds from a term life policy — regardless of whether the policy was held in the accumulation or pension phase of the deceased member.
If a discretionary death benefit pension is paid, where superannuation savings and term life proceeds are in excess of the transfer balance cap, the excess will need to be paid out from superannuation as a lump sum. Therefore, while it may be beneficial to fund the full sum insured inside superannuation for affordability reasons, the entire amount of the proceeds may not be retainable inside superannuation.
Reversionary death benefit pensions
A reversionary death benefit pension is a pension that commenced in the name of the deceased and, upon their death, continues, but in the name of their nominated dependent beneficiary. The pension does not cease at any point, as the reversionary beneficiary is immediately entitled to receive payments.
In this scenario, for pensions that reverted on or after 1 July 2017, a transfer balance credit equal to the value of the reverted pension on the date of death, will show in the transfer balance account 12 months after the date of death. The 12‐month grace period allows the dependent beneficiary enough time to rearrange their superannuation interests to ensure that they do not breach the transfer balance cap.
Any term life proceeds paid from a policy held in the pension account will be paid after the date of death. Therefore, it appears that these will not count towards the transfer balance cap. Industry guidance has not clarified this point, and thus a private ruling may be required.
The rules differ for child pensions derived from death benefits, in that the child’s transfer balance cap refers to their portion of the parent’s retirement phase interests. Once the child pension ceases, the child’s transfer balance will extinguish, and they will be able to utilise a second transfer balance cap as an adult.
If the child pension commences after 1 July 2017, the applicable transfer balance cap will depend on whether the parent had a transfer balance account or not. A transfer balance account will exist for the parent if they had an existing pension at their date of death, or they had previously commenced a pension that they subsequently exhausted.
If the parent did not have a transfer balance account and they died on or after 1 July 2017, the child’s transfer balance cap is their portion of the parent’s superannuation interest (including insurance proceeds) multiplied by the general transfer cap ($1.6 million (2017/18)). For instance, if the deceased adult has four children, each could commence a pension with a maximum account balance of $400,000 ($1.6 million/4).
If there is a superannuation balance available, and the term life sum insured is large, it is possible that not all proceeds will be payable as a pension. The remainder will need to be paid to the child(ren) as a lump sum.
If the parent had a transfer balance account and they died on or after 1 July 2017, the child’s transfer balance cap is their portion of the parent’s retirement phase interest that the child has received as a death benefit pension. A retirement phase interest includes any investment earnings accrued after death but before commencement of the child pension, however, it excludes proceeds from a term life policy.
Therefore, in this scenario, regardless of whether term life insurance is held in the accumulation or pension phase, proceeds from the policy will need to be paid to the child as a lump sum.
While there may be limitations on the proportion of term life proceeds that are payable as a pension, the parent may still choose to fund insurance from, and therefore own cover inside, superannuation.
The recent super changes have inadvertently impacted pension strategies which are utilised as a tax effective strategy for dealing with Life Insurance proceeds, at the same time flexibility has increased with the ability to now rollover death benefit pensions to a super fund of the dependents choosing.
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Source: Kaplan, A step by step guide to insurance and estate planning from 1 July 2017.