Retirees may be forced to withdraw money from super system

Australian Financial Review

2 December 2016

Sally Patten

Retirees will be forced to take money out of the superannuation system if a spouse dies with more than $1.6 million in super.

The warning from lawyers comes as financial advisers caution that thousands more Australians than first thought are likely to be hit by the $1.6 million ceiling on tax-free pensions and will face penalties from the Australian Tax Office if they fail to re-arrange their finances when a spouse dies.

If retirees are forced to withdraw savings from the super system, these will need to be managed separately, potentially adding to the financial responsibilities of senior citizens and triggering higher tax bills.

Daniel Butler of DBA Lawyers said the application of the $1.6 million pension transfer balance cap was akin to a new death tax, adding that it ran counter to a number of government policies (such as the ability to split super contributions with a spouse) that encourage couples to even out their super balances.

“This government has said it is not pinching our super, but mums and dads will really be up in arms about this. This is the a new death tax by disguise,” Mr Butler said.

Other experts said they were concerned that the implications of the $1.6 million cap were little understood by savers.

“This is certainly an issue that has not really come up but it will over time. People haven’t digested the $1.6 million balance transfer cap yet,” said Sam Henderson of advisory boutique Henderson Maxwell.

“I think people haven’t appreciated this yet. It has almost been a bit tucked away,” added Suzanne Mackenzie, a principal at DMAW Lawyers. However Treasurer Scott Morrison said that the issue had been “clear” since the second tranche of the draft legislation was published in late September.

The alarm stems from the Coalition’s decision to include super death benefits in the transfer balance cap. Under the pension rules, when a person dies their pension must be cashed out, either as a pension or a lump sum outside outside the super system. When the $1.6 million pension transfer cap is introduced next July, the surviving spouse will be able to engineer their finances so that they can maximise their pension holdings and retain any extra savings previously held in their pension account in the accumulation phase.

But if the deceased spouse has retirement savings both in a private pension account and an accumulation account, any money in the accumulation account will need to be removed from the super system altogether and managed separately. In addition to being managed separately, earnings will be taxed at their marginal tax rate rather than 15 per cent in an accumulation account or tax-free in a pension account.

In both these scenarios it is likely that super fund members, particularly those in self-managed schemes where there is no professional trustee, will need comprehensive tax advice to arrange their affairs in accordance with the law.

After the death of one member of a couple, the surviving spouse will be given 12 months to comply with the rules. If they fail to act and the combination of their pension and their spouse’s pension exceeds $1.6 million, they will be penalised by the ATO. The earnings on excess savings will be assumed to be about 9 per cent, regardless of the actual rate of earnings, and taxed at 15 per cent. Future breaches will incur stiffer penalties.

If a super account is found to be holding accumulation savings in breach of the law, the fund will be found to be non-complying.

Ms Mackenzie said the government should have considered more closely a combined pension cap for couples. A combined cap, she said, “at least would mean that for elderly people who are relying on an income stream to support medical needs, it means they can keep their money in the super system where income is taxed at 15 per cent”.

Mr Morrison said it would have been unfair to allow couples to combine their caps.

“As the transfer balance cap applies to individuals, not couples, it would not be equitable to exclude reversionary pensions from the $1.6 million. Doing so would allow some individuals to have up to $3.2 million in the tax-free retirement phase,” the Treasurer said, adding that savers had sufficient time to adjust their financial affairs.