Answering that question has never been straightforward and to make matters worse the superannuation rule changes that came into effect on July 1 have added another layer of complexity.
But one thing is for sure, regardless of how complex it all seems every SMSF member should make understanding how their super will be inherited by their beneficiaries a priority. There's a good chance prior planning could save your beneficiaries some tax.
The change that has had the biggest impact on how your super is inherited is the new $1,600,000 pension limit. This is the rule that says the most you can transfer into tax-free pension phase within your super fund is $1,600,000. Remember, you can have more than $1,600,000 inside your super in total but the amount you have above $1,600,000 must be in accumulation phase.
The reason this limit is important is that when you inherit someone's super you only have two choices in how you can receive the funds. First you can elect to receive the funds as a superannuation pension. The other option is to take the funds out of the superannuation environment as a lump sum.
The potential attraction of taking your inheritance as a pension as opposed to a lump sum is that you get to keep the funds within the tax effective environment of superannuation. The reason it's tax effective is that your investment earnings within a super pension are tax free.
What you can't do when you inherit someone's super, and this will make more sense when we consider the example below, is move it to accumulation phase. Because of the obvious tax advantages of a superannuation pension most people elect to receive their superannuation inheritance as a pension But it's this new $1,600,000 pension limit that has potentially thrown a spanner in the works. You will certainly be impacted by this new rule if your current pension plus the pension you inherit totals more than $1,600,000.
Let's consider an example. You have got $1 million in pension phase and your late partner had the same. After they pass you have two choices, you can take your partner's super either as a pension or a lump sum. If you choose the pension option you can only take $600,000 of your partner's super as a pension. This is to ensure you remain under the $1,600,000 limit (i.e. your $1 million pension plus your partner's $600,000). You would then need to remove your partner's remaining $400,000 from super, as you are unable to move it into accumulation phase. Not an ideal result. Luckily there is an option which would allow you to keep the entire amount ($2,000,000) inside the tax-effective environment of superannuation.
In order to elect to take all of your late partner's super as a pension you would first need to move $400,000 of your current pension back into accumulation phase. By doing this your pension is reduced to $600,000.
This allows you to add your partner's $1 million pension and still remain under the
$1,600,000 limit. The-end result, you have a $1,600,000 pension account and a $400,000 accumulation account.
This ability to be able to move "your" superannuation between pension and accumulation phase isn't that well understood but it will no doubt play an important role in superannuation inheritance strategies going forward.
(Article from the West Australian 19/2/2018 written by Rowan Jones)
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