Published 11 Jul 2017
The 2016 Federal Budget introduced a fundamental change to how superannuation funds will be managed in the future.
From July 1 2017, the government will place a limit on the amount of money a person can have in the tax-free 'retirement' phase of a fund, with any excess transferred back to the 'accumulation' stage.
Starting at $1.6 million for the 2018 financial year, the cap is intended to make the superannuation system more sustainable, with all money in the accumulation stage taxed at 15 per cent.
But what happens when a spouse dies and their surviving partner is entitled to death benefits from the deceased's account? Let's take a closer look at how the new rules could impact the bereaved party.
Death benefits and superannuation
When an individual dies, their remaining super is typically transferred to a nominated beneficiary, which is known as a death benefit.
The money can be paid as either a lump sum or as an income stream, but the latter option is only available to dependents of the deceased, such as spouses, de-facto partners and children.
Anyone who is confused about whether they can make a death benefits claim should speak to an experienced superannuation disputes lawyer to ensure they are aware of any entitlements they may have.
However, in some cases, the movement of death benefits to a surviving partner could cause them to exceed the balance transfer cap if they have reached the limit of $1.6 million.
Example of exceeding the cap
The Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016 contains a useful example of how the transfer balance cap could affect death benefits, which we will summarise here:
Kurt and Katherine commence their superannuation income streams with $1.6 million and $1 million in their respective funds. Sadly, Katherine dies leaving Kurt her remaining superannuation interests of $800,000 after drawdowns.
While Kurt's superannuation stream has since dropped to $1.4 million after drawdowns, he will still not be able to transfer more across because he commenced the retirement phase with the full transfer balance cap of $1.6 million.
Instead, he can extract the $800,000 death benefits from the superannuation system entirely as a lump sum payment. Alternatively, he could partially commute $800,000 of his own income stream back into the accumulation phase and then take on the death benefit income stream of $800,000.
Kurt could therefore avoid cashing out any of the money from the superannuation system, while staying within the rules of the Act.
Would you like to learn more about death benefits in Australia? Please contact Gerard Malouf & Partners Superannuation Lawyers.