Important changes to reversionary beneficiary rules on Transition-to-Retirement (TTR) pensions
On 1 July 2017, changes to the taxation of Transition to Retirement (TTR) pensions now require the earnings on TTR pension accounts to be taxed at the same rate as super1. TTR pension account holders also need to be aware of some important changes to the rules around reversionary beneficiaries which may impact their existing estate planning strategies.
A major change relates to the fact that, from 1 July 2017, any pension received by a member’s beneficiaries in the event of their death must be a retirement phase income stream.
A TTR pension is only a retirement phase income stream if the recipient has met a specified condition of release ( reaching age 65, or have notified their super fund that they have met the retirement, terminal medical condition or permanent incapacity condition of release).
As a result of this recent change in legislation, reversionary beneficiaries will be required to notify us that they meet an eligible condition of release at the time of the member’s death for the TTR pension to be able to revert to them.
1Except where the TTR pension has become a retirement phase income stream
James has a TTR pension and has nominated his wife June as the reversionary beneficiary. Unfortunately James dies, however as June is age 53 and has not satisfied a specified condition of release, the TTR pension from James cannot revert to her as it would not be a retirement phase income stream.
What is a condition of release?
In order for a reversionary beneficiary to convert to a retirement phase pension they must be:
- Aged 65 and over,
- between preservation age and age 64 and have ceased gainful employment and never again intend to be gainfully employed for more than 10 hours per week,
- aged 60 to 64 and have ceased a gainful employment arrangement since turning age 60 or
- permanently incapacitated or have a terminal medical condition.
What does this mean for FirstChoice TTR pension members?
Where the person nominated as a reversionary beneficiary on a current or former TTR pension has not satisfied one of the conditions of release, the nominated reversionary will be required to choose to either:
- Take the death benefit as a new death benefit pension by completing a new application form
- Be paid the death benefit as a lump sum in cash
If the nominated reversionary beneficiary does not meet other required criteria for being a valid reversionary beneficiary, the death benefit must be paid to the deceased member’s estate.
Note: The new rules apply to, and may impact, the reversionary beneficiary arrangements of all TTR pensions, including those where the pension has become a retirement phase income stream (eg, because the member has reached age 65).
Impact on transfer balance cap
A transfer balance cap of $1.6 million on transfers to retirement phase income streams has been in place from 1 July 2017.
It’s worth noting that when a death benefit is paid as a new death benefit pension, its value will count toward the beneficiary’s transfer balance cap on commencement. Where instead, a pension automatically reverts to a beneficiary, the value at the date of death will count towards the beneficiary’s transfer balance cap, but is delayed by 12 months.
TTR pension account holders may want review their estate planning arrangements
These recent changes highlight the need for TTR members with reversionary beneficiaries set up on their accounts (including those whose TTR pensions are now in retirement phase) to review their estate planning arrangements and to update them where required.
This could include revoking a reversionary nomination and replacing it with a non-lapsing death benefit nomination where the person nominated as a reversionary hasn’t satisfied one of the specified conditions of release.
If you have not made a valid death benefit nomination, your death benefit will go to your legal personal representative and may not go to the person(s) you’d prefer it to. You should regularly review your nomination(s) to ensure it accurately reflects your wishes and your personal circumstances.
Speak to your financial adviser
The new rules for the reversionary beneficiaries on TTR pension accounts are quite complex so it’s a good idea to review your estate planning strategy in detail with your financial adviser.
Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468 (Colonial First State) is the issuer of super, pension and investment products. This document may include general advice but does not take into account your individual objectives, financial situation or needs. You should read the relevant Product Disclosure Statement (PDS) carefully and assess whether the information is appropriate for you and consider talking to a financial adviser before making an investment decision. A PDS for Colonial First State’s products are available at colonialfirststate.com.au or by calling us on 13 13 36.