By Mark Ellem
In our previous article, we discussed how a surviving spouse can receive a death benefit pension and how the new transfer balance cap operates. This second article focusses on transferring a death benefit pension to another fund, which can be complicated, but new legislation from 1 July 2017 simplifies the process.
It is not uncommon for a surviving spouse to move their death benefit pension to another superannuation provider. The death benefit pension may be commenced or the pension may revert on death from an SMSF. If the surviving spouse does not wish to continue with the SMSF, they may transfer the pension to another non-SMSF provider. Under the previous rules, the surviving spouse had to wait until the expiration of the ‘death benefit period’ (see explanation below) before affecting the transfer to the new superannuation fund, to avoid a rather nasty tax outcome.
However, even after waiting for the ‘death benefit period’ to pass, once the death benefit pension was transferred to the new fund and a new pension commenced, the new pension will have lost any link to being a death benefit pension. Consequently, if the surviving spouse was under age 60, the taxable component of the pension was assessable, but with no 15% tax offset.
Under the law that applied to 30 June 2017, if you commuted a death benefit pension within the ‘death benefit period’, the commuted amount retained its character as a death benefit payment. The ‘death benefit period’ was generally the latter of:
If a surviving spouse was receiving a death benefit pension (including a reversionary pension) and it was fully commuted and the commuted amount was withdrawn as a lump sum within the ‘death benefit period’, the lump sum would still be a death benefit payment and consequently would be received 100% tax-free.
However, if the commutation of the pension occurred outside of the ‘death benefit period’, the resulting lump sum benefit payment would be an ordinary lump sum benefit payment and taxed according to the age of the surviving spouse, as follows:
Prior to the new law starting on 1 July 2017, if a surviving spouse, under age 60, elected to receive a lump sum death benefit payment, rather than a pension, they needed to ensure they fully commute the death benefit pension to a lump sum within the ‘death benefit period’, otherwise tax may be levied.
From 1 July 2017, it is possible to roll over death benefit entitlements to other funds without having to wait for the expiration of the ‘death benefit period’. Once the amount has been rolled over it will continue to be recognised as a death benefit superannuation interest and must be used to commence an income stream from the recipient fund or cashed out as a lump sum. This allows a beneficiary to rollover a death benefit pension to a fund of their choice, including a SMSF. It retains the concessional tax treatment associated with a superannuation income stream death benefit (i.e. tax offset equal to 15% of the taxable component for those under age 60).
In effect, the ‘death benefit period’ was abolished from 1 July 2017. No longer will this period need to be taken into consideration when deciding on whether to fully commute a death benefit pension or transfer it to another superannuation fund. In essence, once a death benefit pension, always a death benefit pension. Further, the only way you can cease a death benefit pension is to commute it, either partially or fully and remove it entirely from the superannuation system as a lump sum benefit payment. That is, from 1 July 2017, you cannot commute a death benefit pension back to the accumulation account of the surviving spouse. However, as it will retain its character as a death benefit pension when commuted by a surviving spouse, the lump sum will be received 100% tax-free, no matter how long after the original member’s death or the age of the surviving spouse.