Multi-generation pension strategy planning

16 June 2014
Comments Comments Off on Multi-generation pension strategy planning
16 June 2014, Comments Comments Off on Multi-generation pension strategy planning

We've looked at George and Mabel's situation recently, but let's recap...

  • George and Mabel are members of a SMSF.
  • George is aged 65 and has an account based pension.
  • Mabel is aged 57, still working and has a TRIS.
  • Both members have reversionary pensions with one another as reversionary beneficiaries.
  • If George dies, his benefits would revert to Mabel and stay in the SMSF.

Reversionary beneficiary of a beneficiary

Our question for today is in regards to when Mabel changes her pensions to make her 16 year old son the reversionary beneficiary.

For arguments sake, let’s say that Mabel dies the day after the pension documentation and other applicable documentation are completed. Her son is still 16 years old and is the reversionary beneficiary of both pensions.

Where does this leave things?

  • Does the son become instantly become a member of the SMSF and take over the two pensions?
  • Does the son need to ensure he meets the minimum pension requirements?
  • Are the pensions assessable in his personal name?
  • At any point in time would the pensions revert back to accumulation?
  • Would there be any differences if the 16 year old son was taking over an account based pension?

Let's look at this in detail

Set up and governance

If Mabel is to add the child then it will need to be rolled back and a new pension commenced with the child reversionary pension beneficiary.

Which means we start the whole process all over again.

For the unrestricted non-preserved benefits an accounts based pension may be commenced but it will have tax free/taxable component as seen in the accumulation account.

Any other monies will need to be a TRIS until the son meets a permanent condition of release.

Taxation

As it is a new pension with a child reversionary the taxation of the child will follow that of the mother.

If Mabel is under age 60 then the taxable component will be assessable with a 15% tax offset. Any tax free component is tax free of course. Once Mabel turns age 60 it converts to a tax free pension.

In our scenario the son will take over the pension and have the same tax profile as the mother and will also require a minimum pension payment.

The son still need to ensure he meets the minimum pension payment for this year. After 1st of July it is going to be recalculated.

Importantly after the death of his mother, the pension will no longer be a TTR pension. Death is a full condition of release, so the limitations are removed and the beneficiary can continue the pension as a normal account-based pension.

The child could revert the pension back to accumulation phase should they choose to do so or alternatively take it out as a tax free lump sum as they are a dependent and under age 18 within six months of probate.

Another strategy

Another strategy pre-rollback for the addition of the child reversionary may be to withdraw the father’s money from the fund tax free and then recontribute as a tax free component into the fund. Then any TRIS with child beneficiary will be tax free.

Just be careful that when contributing there is no taxable component in the accumulation account to pollute the tax free component.

Superannuation Industry Supervision Regulation 6.21 applies so that the pension going to the child can only last to age 25 and must be commenced prior to age 18 unless they are financially dependent upon the mother.

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