Do you and your spouse have more than $1.6 million (in total) in super?

There is a cap of $1.6 million on the assets you can have supporting a tax-free super pension. This is called the ‘transfer balance cap‘, or ‘TBC‘. People describe the imposition of this cap as “big”, “significant” and “an overhaul”. Since we are talking superannuation, these changes potentially affect all of us.

You and your spouse each get a separate $1.6 million cap, (i.e. $3.2 million in total). At first glance these figures may seem generous. Particularly as both you and your spouse get $1.6 million. But there is a sting in the tail. When calculating your TBC, you need to include any pension assets you receive on the death of your spouse. This is because you do not inherit your spouse’s TBC. You only inherit their super death benefits. When your spouse dies, so does their cap…

Super pensions that pass to you from your spouse when they die may put you over your cap. This will have adverse tax outcomes.

You need to plan for this as part of your estate planning.

Before 1 July 2017 there was no limit on the assets that could support your super pension. So your spouse could simply leave you the benefit of their pension. But couples must now re-think their estate planning strategies in light of these rules. You should pull out your Wills, pension documents and death benefit nominations, and see if anything needs changing. You may need to tweak your strategies to accommodate these new rules.

Remember the TBC only applies to your retirement income stream, i.e. pensions. It does not place any limit on the total assets you can hold in super. You can still have more than $1.6 million in your fund – both before and after retirement. So you have some flexibility to deal with this cap. For example, you may hold assets in accumulation phase, and then inherit a pension. While the pension still counts towards your pension cap, you can leave your other accumulation assets in super. If you have already used your pension cap, the super assets you inherit will need to be moved out of super as a lump sum.

Your deceased spouse may leave you a super pension in the form of either:

  • A superannuation death benefit pension. This is a new pension created and paid to you after your spouse has died. It comes about under the terms of a binding death benefit nomination or other agreement; or
  • A reversionary pension. This is an existing pension your spouse received at the time of their death, that passes to you when they die.

The super regime treats these two super pensions differently, which presents an important timing strategyIf you receive a new pension on your spouse’s death and go over the cap, you must reduce your pension assets ‘as soon as practical’. The ATO says the time limit is 6 months. But if your spouse leaves you a reversionary pension, you have up to 12 months to reduce your super pension balance under the $1.6 million cap.

If you are members of a SMSF you should review your succession planning to properly manage this cap. This will be relevant if you and your spouse’s balances exceed $1.6 million in total. This is because when your spouse’s balance passes to you, it will be counted towards your single $1.6m cap (or vice versa).  You should also review your Wills to ensure they deal with any surplus.

We can help you do this.

Call us now on 1300 654 590 to review your Estate Plan!

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