Inheriting superannuation? You have options
Receiving an inheritance comes with mixed emotions and ensuring you understand the impact on your circumstances is critical. Inheriting a superannuation fund especially, requires planning to ensure you are getting the best outcome. Unlike a cash inheritance, there may be tax implications depending on how you wish to receive the funds. Before completing and processing any death benefit paperwork provided by the superannuation fund it is important you obtain advice.
What are my options?
When inheriting superannuation, it is important to understand there are a number of ways you can request the superannuation account be transferred to you. These ways may depend on your age and relationship to the deceased. Options include; a lump sum payment or the continuation of a pension account, or maybe a combination of both.
What many people do not know, is depending on the option you select, you may be eligible for an anti-detriment payment[1].
What is an anti-detriment payment?
If you are considered a dependant of the deceased under superannuation legislation and receive a lump sum death benefit payment, you may be entitled to an anti-detriment payment. The payment is broadly designed to restore the deceased’s death benefit to what it would have been if ‘contributions tax’ hadn’t been paid. In effect, you receive a ‘refund’ of the contributions tax and this is paid to you in addition to the deceased’s superannuation balance.
Please note, the government has proposed removing the anti-detriment provisions from 1 July 2017.
Case Study 1 (Spouse inheriting)
Betty, aged 61, had $450,000 in an Account Based Pension, paying a pension of $30,000pa. Her husband, Ian, aged 62, was listed as her superannuation beneficiary. Upon Betty’s passing, Ian could receive Betty’s account in the following ways:
- 100% Account Based Pension
- 100% Lump Sum
- Partial Lump Sum and partial Account Based Pension
Option 1: Ian requests that Betty’s account continue as an Account Based Pension in his name, and can continue to receive her $30,000pa. However, Ian will not qualify for any anti-detriment payment unless he converts some or all of the Account Based Pension to a lump sum within the prescribed period[2].
Option 2: Ian can claim the superannuation as a lump sum, he would receive the account balance of $450,000 plus an anti-detriment payment of $67,500. This anti-detriment payment is based on Betty’s superannuation details and will differ based on personal circumstances. As Ian is able to contribute to superannuation, being under age 65, he can add the entire $517,500[3] to superannuation. Ian then has the ability to recommence an Account Based Pension and continue to receive regular payments of $30,000pa.
In effect, Ian has achieved the same outcome as Option 1, however has received an additional financial benefit of $67,500.
Option 3: Ian has the option to accept a partial Lump Sum payment and a partial Account Based Pension. Ian is able to select how much he claims under each option. The anti-detriment payment will be payable on the component taken as a lump sum.
Case Study 2 (Adult Children inheriting)
Joan, 73, had a superannuation account balance of $370,000 at the time of her passing. Joan’s husband passed away some years ago, so her children, Maree (aged 40) and John (aged 42) were listed as the beneficiaries of her superannuation.
As Maree and John are financially independent, they are required to take Mum’s superannuation as a lump sum. However, Maree and John are required to pay tax on the taxable component of Mum’s account. Under superannuation legislation, Maree and John are therefore considered dependents, which allows for an anti-detriment payment to be made on the taxable component upon receipt of the funds. Essentially, the anti-detriment payment will offset the tax payable. This allows Maree and John to receive an equal portion of Joan’s account of approximately $185,000.
Maree and John, need to consider their personal financial situation to determine what to do with their inheritance. This may include paying off the mortgage or using the proceeds to enhance their superannuation or investment accounts.
Understanding your options.
It is important to review your financial situation with your adviser to determine if your superannuation fund provides for anti-detriment payments, and what the potential benefit may be to your beneficiaries.
If dealing with your parents’ or spouse’s estate and their superannuation, we encourage you to discuss with your financial adviser what benefit option and future investments would be most suitable for your circumstances. Should you be in receipt of a Centrelink payment, it is important to consider how an inheritance may impact your future payment.
If you have any questions regarding an upcoming superannuation inheritance or how your superannuation may be transferred to a loved one, feel free to contact our office.
[1] It was proposed in the May 2016 Budget anti-detriment payments be abolished. This is yet to be legislated.
[2] Prescribed period is generally the later of three months from the grant of probate or six months from the date of death. Date may be later due to legal disputes or trustee commencing the period after commencement of pension to beneficiary
[3] In this example, Ian had not made any contributions to superannuation and was able to take advantage of the bring forward provisions to contribute up to $540,000.