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Succession planning and the transfer balance cap

The superannuation transfer balance caps have been problematic for SMSF members who don’t take careful consideration when succession planning.

Failure to understand the impact of these transfer balance cap changes can have on your finances may force you to transfer large amounts of money out of your super.

The transfer balance cap of $1.6 million that was introduced as of 1 July 2017 limits the amount of superannuation that can be transferred into an individual’s retirement phase. The cap incorporates all accounts the individual holds balances in.

SMSF members ought be weary of the scenario in which a SMSF is paying two pensions, one to each party of a couple where both parties are receiving money under the transfer balance cap. When one of the spouses die, the remaining spouse could be in breach of the transfer balance cap because now they are the sole beneficiary of more than $1.6 million.

Luckily, if you take time to plan carefully how to avoid the above limitations, you can have control over where (and to who) your super will go to when you pass.

Consider the following:

Accumulation vs pension phase
The new transfer balance cap rules state that, at any given time, individuals cannot have more than $1.6 million in their pension phase. The money in the pension phase is taxed at zero percent; the money in the accumulation phase is taxed at 15 per cent. If you are already in the pension phase, and are with a spouse also in the pension phase, it is fruitful to think ahead as to what will happen to the money when one of you passes. Perhaps looking into what investments you can make now would be wise, particularly given that investment properties held for a period of longer than 12 months are taxed at a rate of 10 per cent.

Nominations
One option is to execute a binding death benefit nomination, which allows an individual to nominate who they would like their death benefits to be paid to. When preparing the BDBN, an individual can elect where their money goes and the trustee of their estate is bound to carry out these wishes. The other option is to execute a non-binding death benefit nomination, which allows the trustee some flexibility as to where they place your money. This is a good option if your wishes for your money are not as tax effective as possible; the trustee has the option to vary where you wanted the money to be placed.

In addition, when succession planning, it is important to remember that superannuation is not an asset that forms part of an individual’s estate; there are limitations as to who is a beneficiary of another’s superannuation. An individual must be a dependent of the deceased or a legal personal representative. If an individual fits this criteria, there are only two ways that they can be paid the benefit; through an income stream or via a lump sum.

To ensure you are not leaving your spouse or children the stress of the repercussions of breaching the transfer balance cap when you pass, speak to one of our accountants to establish the best possible plan for your estate.

Posted on 24 January '18 by , under Super.

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Transition to retirement

The transition to retirement (TTR) strategy allows you to access some of your super while you continue to work.

You are able to use the TTR strategy if you are aged 55 to 60. You can use it to supplement your income if you reduce your work hours or boost your super and save on tax while you keep working full time.

  • Starting a TTR pension: To start your TTR pension, transfer some of your super to an account-based pension. You have to keep some money in your super account so that you can continue to receive your employer's compulsory contributions as well as any voluntary contributions you may be making.
  • Government benefits and TTR: The benefits you or your partner receive might be impacted if you choose to opt for this strategy. How and what exactly will change might become clearer upon discussing this with a Financial Information Service (FIS) officer.
  • Life insurance and TTR: In some cases, the life insurance cover you have with your super may stop or reduce if you start a TTR pension – check this before making any decisions or changes.

TTR can help ease your mind as you transition into retirement but it can be a bit complex. Before you choose whether you want to use TTR to reduce work hours or save on tax, or even if you want to use TTR altogether, you should figure out how this will impact all aspects of your finances.

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