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Self Managed Super Fund (SMSF) Article
Last act - is there life in pensions after death?
By Tony Negline.
This article may be out of date.
27th August 2008
Anyone structuring a superannuation pension needs to address the question - sooner rather than later – what happens when the pensioner dies? As always, the trust deed of a self managed super fund (SMSF) is essential reading to see what it allows.
Having worked out this out you can then ask two questions. When the pensioner dies will income payments continue? If so, who will receive that income?
Pension payments can continue in one of two ways. Before a pension begins (or "commences" as the super industry calls this event) the pensioner can specifically nominate a `reversionary', sometimes called `reversionary beneficiary'. This term means that on death, pension payments are automatically paid to the nominated reversionary. Most commonly the reversionary would be the pensioner's spouse.
The super laws do not allow the reversionary to receive a bigger income than the pre-death income.
Having this certainty in place can be very helpful for investors who don’t want their surviving spouse to be worrying about running their SMSF. With a reversionary pension income payments continue to be made.
Disgruntled beneficiaries of deceased estates can find these types of arrangements very hard to challenge.
One downside with this structure is that for account-based pensions the life expectancy factor used to determine the amount of Centrelink income test income is based on the pensioner or reversionary's longer life expectancy. This may means that there is more income included in Centrelink's income test. Less aged pension may be the net result.
Another downside with this strategy is its lack of flexibility if circumstances and needs change in retirement and especially if the reversionary dies before the pensioner or the reversionary ceases to be the pensioner's spouse.
When these events occur restructuring often becomes necessary and can be messy.
An alternative to nominating the reversionary before a pension commences is to pay a new pension after the pensioner dies to a benenficiary.
With these types of arrangements all structural issues are reset and recalculated. For example the amount of income counted for Centrelink's income test and the amount counted for assets test purposes is redetermined and is based on the beneficiary's life at the time of death and not on the original pensioner’s age. The minimum amount of income that must be paid is also recalculated.
Who would receive this new pension paid on death of the original pension? This very much depends on what is required. There are essentially three choices:
- No nomination. This option basically leaves the decision making up to the super fund trustee. The published decisions of the Super Complaints Tribunal (which doesn't have jurisdiction over SMSFs) show how dangerous this strategy can be
- A binding nomination which only lasts for three years. It is possible for a pensioner to specifically nominate a dependant and the type of pension they are to receive. However what happens if this nominated dependant dies?
- A binding nomination which has no time-frame limits and similarly can be used to nominate a dependant and the type of pension they are to receive.
Whatever option someone chooses, it is very important that the nomination fits in well with their Will. Superannuation is not automatically part of a deceased's estate but it's important that the two are consistent.
Flexibility is a key advantage with the strategy of paying new pensions post-death.
If circumstances change during the pensioner's life then arrangements can be superseded. Clearly good clear documentation is essential with this strategy. If a pension is paid what personal control will the pensioner have?
Issues that might arise include: will the rules of the fund or the rules of the actual pension allow them to convert the pension to a lump sum; if the new pensioner were to die what would happen to the assets of the fund – some pension structures, but not all, allow these assets to be paid as a pension to dependants of the reversionary.
Finally an option can exist whereby the assets backing a pension at the time of death can be paid out as a lump sum. The same three options above can be used here. If the death benefit is paid out within three months of death or six months of the granting of probate or letters of administration (whichever is longer) and the benefit is paid to a dependant then tax concessions may be available on the payment of the benefit.Finally the income tax payable on these payments depends on the age of the deceased and the age of the recipient. If the deceased pensioner is at least 60 then regardless of the age of the beneficiary any pension paid will be fully tax-free. If the deceased pensioner is under 60 then if the beneficiary is at least 60 then the pension will be also be fully tax-free. However if the beneficiary is under 60 then the pension will be taxed but less a 15% rebate.
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