The inability to roll over the portion of death benefit pensions that exceed a surviving member’s transfer balance cap (TBC) under the new super reforms means SMSF trustees must scrutinise the tax implications of retaining these monies inside super or exiting them from the system, an industry consultant has said.
In scenarios where a surviving member in an SMSF with an existing retirement income stream of their own but is then the recipient of a death benefit pension that pushes their TBC over the prescribed $1.6 million limit, three actions are generally available to the member in question, SMSF Design master SMSF designer Tracey Besters told delegates at the 2017 selfmanagedsuper Trustee Empowerment Day on the Gold Coast recently.
The options are to take the entire death benefit pension as a lump sum payout, commence a death benefit pension that would not result in a breach of the member’s TBC and take the remainder as a lump sum payout, or commence a death benefit pension and commute as much of the existing pension as is necessary to comply with the individual’s TBC, Besters said.
But before selecting any of these strategies, the tax circumstances of the death benefit pension beneficiary had to be considered carefully – a consideration not really required under the old legislation, she warned.
“There would be no tax payable on the benefit paid to the beneficiary if taken as a lump sum outside of super, but in all likelihood they would have to do something with that lump sum, such as investing it,” Besters said.
“The beneficiary would then have investment earnings and the tax on those investment earnings are going to be at their marginal tax rate.”
She said this had to be compared to the ability of retaining the death benefit pension inside the SMSF where the applicable tax rate would be zero.