Insurance and the Transfer Balance Cap

August 2019

The introduction of the $1.6 million Transfer Balance Cap (TBC) restricted the maximum amount that an individual can hold in the tax-free retirement pension phase in superannuation.

For SMSF members holding life insurance policies within their fund, it is worth noting how the payout under the policy upon their death can impact their beneficiaries’ TBC as this can have significant implications for estate planning purposes. The payout will be treated differently under these new rules depending on whether the member’s pension was non-reversionary or reversionary in nature.

Non-Reversionary vs Reversionary Pensions

A non-reversionary death benefit pension is a pension which commences when the trustee of the super fund receives specific instructions (e.g. from a death benefit nomination) or exercises their discretion to pay the pension to a dependant beneficiary upon the death of the member.

By contrast, a reversionary pension is one where the pension automatically “reverts” and continues to be paid to the member’s nominated dependent reversionary beneficiary (e.g. their spouse, child under the age of 18, financial dependent, etc.) upon their death.

What’s the difference?

There is a significant distinction in the TBC treatment between a non-reversionary and a reversionary death benefit pension which is very important to note:

  • In the case of a non-reversionary death benefit pension, a transfer balance credit will arise in the beneficiary’s transfer balance account on the day the beneficiary starts to become the recipient of the pension. The value of this credit will be the value of the pension on the date of commencement of the pension – this value may include post-death investment earnings that accrued on the account balance along with any life insurance proceeds that were received by the SMSF post-death and before the commencement of the pension. Any amounts in excess of $1.6 million may need to be cashed out of the superannuation fund as a lump sum.

  • In the case of a reversionary death benefit pension, the transfer balance credit will arise in the reversionary beneficiary’s transfer balance account 12 months after the death of the original pensioner. However, the value of this credit will be the value of the deceased member’s pension balance on the date of death. Importantly, what this means is that, if this pension account was used to pay the insurance premiums on the member’s life insurance policy, any post-death investment earnings and life insurance proceeds received by the fund (no matter how large) will not result in any additional credits in the reversionary beneficiary’s Transfer Balance Account and these amounts can remain in the tax free retirement pension phase.

It would appear that having a reversionary pension in place in the SMSF may provide a considerable advantage to the beneficiary, especially where the member funds their life insurance premiums from the pension account, as it will help ensure that the life insurance proceeds are not counted towards the beneficiary’s TBC.

If you have any SMSF estate planning queries please contact the SMSF team.

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Topics: Superannuation

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