Reversionary pensions are they still worthwhile? Yvonne Chu Senior Manager, FirstTech, Colonial First State

Transcription

1 Reversionary pensions are they still worthwhile? Yvonne Chu Senior Manager, FirstTech, Colonial First State

2 Disclaimer This presentation is given by a representative of Colonial First State Investments Limited AFS Licence , ABN (Colonial First State). Colonial First State Investments Limited ABN , AFS Licence (Colonial First State) is the issuer of interests in FirstChoice Personal Super, FirstChoice Wholesale Personal Super, FirstChoice Pension, FirstChoice Wholesale Pension and FirstChoice Employer Super from the Colonial First State FirstChoice Superannuation Trust ABN and interests in the Rollover & Superannuation Fund and the Personal Pension Plan from the Colonial First State Rollover & Superannuation Fund ABN and interests in the Colonial First State Pooled Superannuation Trust ABN The presenter does not receive specific payments or commissions for any advice given in this presentation. The presenter, other employees and directors of Colonial First State receive salaries, bonuses and other benefits from it. Colonial First State receives fees for investments in its products. For further detail please read our Financial Services Guide (FSG) available at colonialfirststate.com.au or by contacting our Investor Service Centre on All products are issued by Colonial First State Investments Limited. Product Disclosure Statements (PDSs) describing the products are available from Colonial First State. The relevant PDS should be considered before making a decision about any product. Stocks referred to in this presentation are not a recommendation of any securities. The information is taken from sources which are believed to be accurate but Colonial First State accepts no liability of any kind to any person who relies on the information contained in the presentation. This presentation is for adviser training purposes only and must not be made available to any client. This presentation cannot be used or copied in whole or part without our express written consent. Colonial First State Investments Limited 2015.

3 Options for SMSF pensioners No nomination default provisions apply Preferred nomination Binding death nomination (lapsing or non-lapsing) Reversionary pension Where estate planning certainty required, choice is generally between BDN and reversionary pension

4 Practical considerations Reversionary pensions require no trustee discretion at all Reversionary pensions require less paperwork No recalculations required Limited to one beneficiary only

5 Estate planning goals Often little difference where benefits will be paid to surviving spouse Reversionary pensions arguably provide more certainty generally Reversionary pensions are paid under terms that need to be valid from the start Binding death nominations often not checked for validity until it s too late Could be easy to not meet all specific requirements for valid nomination (Donovan v Donovan (2009) QSC 26) Reversionary pensions still work where a couple dies in close proximity

6 Susan and John Susan (age 63) has a $500,000 account based pension in her SMSF Wants John (spouse, age 62) to benefit from her super (or Mel - their child aged 18) Puts binding death nomination in place nominating John Susan also has 2 adult children from a previous relationship (Grant age 28 and Dana age 26)+ Has made provision for them from her non-super assets via her Will Susan and John die together in a car accident Susan s brother Tony is her executor, steps in to act as director of the Fund s corporate trustee 2 months later, Tony considers the binding death nomination no longer valid as it nominates John who is no longer alive Tony refers to Fund s default provisions, must pay to Susan s estate By using a binding nomination: Grant and Dana are likely to get much more than Susan intended Mel is likely to get nothing

7 Susan and John What if Susan had made John a reversionary beneficiary of her account based pension? In the absence of knowing who dies first, Susan is deemed to die first as she is older Unlike binding nomination, pension automatically transfers to John immediately upon Susan s death Upon John s death, Fund s default rules then require his death benefit to be paid to his LPR Provided John s Will made provisions for Mel, reversionary pension strategy provides more certainty that: Grant and Dana get the intended amount of benefit Mel is provided for even if Susan and John die together

8 Nominating minor children Mike has two children, Laura (aged 23) and Terry (aged 15) Makes Laura the executor of his estate she will benefit from non-super assets ($300,000) Has nominated Terry as a reversionary beneficiary of the account based pension ($250,000) running through his SMSF Can you see any issues with this strategy?

9 Tax treatment on death TR 2013/5 confirmed that an account based pension ceases upon Death (unless it automatically reverts) Full commutation Failure to comply with pension rules When capital is exhausted Regulations introduced for non-reversionary pensions to allow earnings tax exemption and component calculation to continue between death and payment of lump sum or new income stream Excludes amounts of life insurance and anti-detriment

10 Tip life insurance Greg (age 56) has an account based pension ($500,000 balance) in his SMSF 80% tax free component Fund also holds $1 million of life cover for him, premiums paid from pension balance Greg wants his spouse (Heidi) to receive his account based pension (including life insurance) in the event of death Greg dies component of his death benefit will look very different depending on whether he s used a BDN or reversionary pension

11 Tip life insurance Heidi s benefit BDN Reversionary Tax free component $400,000 (27%) $1,200,000 (80%) Taxable component $1,100,000 $300,000 Total balance $1,500,000 $1,500,000 Reversionary pension option might not make that much difference to Heidi Any death benefit lump sum tax free to her Pension payments all tax free once Greg or she has reached 60 But what about her beneficiaries if she dies in 10 years time? Remaining pension balance $1.1 million Paid as lump sum to adult child Kim Kim s benefit BDN Reversionary Tax free component $293,370 (27%) $880,000 (80%) Taxable component $806,630 $220,000 Total balance $1,100,000 $1,100,000 Tax and Medicare $137,127 $37,400 Difference $99,727

12 Trap where lump sum required Where binding nomination, can elect to receive lump sum death benefit Assets deemed to remain in pension phase due to new Regulations, provided paid as soon as practicable Must initially take reversionary pension as an income stream. Can then commute However, Regulations don t apply to this commutation TR 2013/5 confirms that a pension ends upon a full commutation request taking effect This always occurs prior to the commuted lump sum being paid Full commutation of a reversionary pension can therefore lead to significant tax Selling assets to fund the full commutation Paying the commutation by in specie transfer Where lump sum may be required, BDN may be more appropriate

13 Social security income test Income test treatment from 1 Jan 2015 (default) Deemed Income test treatment if grandfathering applies is same as pre-1 Jan 2015 rules Payment per financial year less deductible amount* * Deductible amount = Purchase Price (less commutations) / Relevant Number Under previous rules, non-reversionary often preferred, because for reversionary: Deductible amount based on longer life expectancy Deductible amount is not recalculated upon reversion Grandfathering (where possible) often better than deeming as client can control the level of assessable income What two criteria need to be met for an account based pension to qualify for grandfathering?

14 Extending grandfathering Centrelink will recognise a reversionary beneficiary added to an existing ABP Will recalculate deductible amount, but only apply going forward Calculation still based on original purchase price and longest LE at commencement Will remain grandfathered as long as existing ABP does not cease Important to consider Whether the Fund s governing rules allow a reversionary to be added without recommencing the pension Many large super funds have historically required new pensions to be commenced Any loss of social security pension now versus benefits gained in the future as a result of extending grandfathering

15 Example Al and Rhonda (both age 67) are age pensioners Al has a $270,000 account based pension through his SMSF Binding death nomination to Rhonda only Commenced in 2013 with purchase price of $300,000 Draws annual payment of $18,000, deductible amount of $15,609 ($300,000 / 19.22) For income test purposes, assessable income of $2,391 from the ABP Al s SMSF s rules allow him to add Rhonda to existing pension as reversionary beneficiary If he does, immediate impact Deductible amount reduces to $13,605 ($300,000 / 22.05) Assessable income from ABP increases to $4,395 Maximum combined age pension loss of $1,002 for each year Al remains alive

16 What happens if Al dies? Assessable income from pension Keep BDN Deemed income of $8,775 pa ($270,000 x 3.75%) Difference in assessable income Maximum increase in age pension Add reversionary $4,395 (no change) $4,380 less each year $2,190 more each year Losing up to $1,002 each year to then gain up to $2,190 each year Additional considerations Added beneficiary might have a shorter life expectancy Clients might be asset tested now, or after death Clients might be able to minimise the impact of the deductible amount change by drawing from their ABP differently (draw less, draw lump sums, draw at the end of the financial year)

17 Trap: reversion to spouse Where one member of a couple dies, surviving spouse often sees a big reduction or loss of their age pension, as they: often ends up with most / all of combined assets starts being assessed against single asset / income test thresholds Strategy to avoid this is to pass assets to other beneficiaries (e.g., adult children) via Will rather than to surviving spouse first Surviving spouse can t receive then pass on, as would be gifting Reversionary pension does not work with this strategy Need to set up account based pension with binding death nomination to LPR / estate

18 Is it always better for a client to nominate someone in their SMSF? Reversionary or BDN are appropriate where: Member doesn t fully trust the people who will control the SMSF More concerned about certainty on who receives the benefits as oppose to tax implications. Reversionary nomination may not be needed and trustee discretion can be a good thing, where: Members trusts each other Trustee discretion may lead to better tax outcome Change in client s circumstances between the time when the BDN is made and the time of death

19 Summary Reversionary pensions are the appropriate option in many situations Easier admin at death and greater estate planning certainty Tax components and life insurance Centrelink deductible amount no longer an issue Extending social security income test grandfathering But need to avoid traps Nominations that become invalid over time as can t pay income stream on death Full commutations after reversion Automatic reversion to surviving spouse

20 Thank you

21 Disclaimer SMSF Association 2016 This presentation is for general information only. The material and opinions in this presentation are those of the author and not those of the SMSF Association. Every effort has been made to ensure that it is accurate, however it is not intended to be a complete description of the matters described. The presentation has been prepared without taking into account any personal objectives, financial situation or needs. It does not contain and is not to be taken as containing any securities advice or securities recommendation. Furthermore, it is not intended that it be relied on by recipients for the purpose of making investment decisions and is not a replacement of the requirement for individual research or professional tax advice. This presentation was accompanied by an oral presentation, and is not a complete record of the discussion held. No part of this presentation should be used elsewhere without prior consent from the author.