Last month, we spoke about the Transition to Retirement Income Streams (“TRIS”) and the significance of retirement planners in relation to it. These pensions allow individuals to access their superannuation benefits before retirement or without terminating their employment.
With the new super reforms, which came in on 1 July 2017, introducing two types of TRIS now, the once simple pension type has become complex when a member is alive and when they pass away.
Pensions and Death of the Member
When a pensioner dies, regardless of whether the type of pension was a TRIS or the more common Account Based Pension (“ABP”), the payment of the superannuation death benefit will depend on many factors, such as the following:
- What does the trust deed specify for payment of death benefits?
- Was the pension reversionary or non-reversionary?
- Is there a death benefit nomination in place? Was it binding or non-binding?
- Which takes precedence, a reversionary pension or a binding death benefit nomination?
- Who can receive a death benefit?
- What form can it be paid for? How is it taxed?
Due to all these different variables, we will only concentrate on items 2 and 6 within the context of TRIS for this article. The remaining items will be discussed in future articles.
Reversionary versus Non-Reversionary Pensions
A reversionary pension automatically ‘reverts’ (i.e., continues) to the nominated beneficiary upon the pension member’s death. Practically, this means that the pension terms which the deceased pension member had in place for that particular pension will continue in the same manner to the nominated beneficiary. In doing so, only the recipient of the pension payments changes. For example, if the pension member and reversionary beneficiary are both aged 60 or above, the tax-free nature of these payments would continue.
Generally, most pensions specify the reversionary beneficiary when the income stream is established, and it cannot be altered. However, some pension agreements permit the reversionary beneficiary to be changed after the pension commences.
If a pension is not specified as reversionary (i.e. non-reversionary), then upon the death of the pension member, the superannuation interest of that pension will no longer remain in the pension phase but instead revert to the accumulation phase, thereby potentially triggering income tax and capital gains tax within the fund.
TRIS since 1 July 2017
Since the super reforms came in on 1 July 2017, there are now two types of TRIS:
- Accumulation Phase TRIS
- Retirement Phase TRIS
With the main changes being:
- 15% tax on earnings now applies (previously tax-exempt) for accumulation phase TRIS; and
- no lump sum payments are permitted under an accumulation phase TRIS.
A Retirement Phase TRIS commonly exists when the pensioner has reached age 65 or their preservation age and satisfied the retirement definition. An Accumulation TRIS is often when the member has not met a retirement definition.
Does the age of the reversionary beneficiary matter?
Yes. Currently, there is an anomaly in the legislation whereby if the pensioner has a Retirement Phase TRIS and passes away, the reversionary beneficiary’s pension is only a Retirement Phase TRIS if they have met a condition of release, regardless of whether the deceased had done so.
For example, suppose the husband was 64 and had a reversionary Retirement Phase TRIS to his wife, who was 55 (born 1 April 1963), upon his passing. In that case, the pension does not automatically become a Retirement Phase TRIS because she has not met her preservation age of 58. As such, she would have an Accumulation Phase TRIS.
This example highlights the inequity in tax as the wife would be paying 15% tax on the earnings under an Accumulation Phase TRIS compared to nil tax if it was a Retirement Phase TRIS.
This irregularity in the legislation is currently being addressed. This is expected to be rectified shortly so that a Retirement Phase TRIS will continue automatically to the reversionary beneficiary unchanged, regardless of the beneficiary’s age.
Stay tuned for next month’s edition to discuss the other issues raised above.
Kreston Stanley Williamson Team
*Correct as of April 2018
Disclaimer – Kreston Stanley Williamson has produced this article to serve its clients and associates. The information contained in the article is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas in this article, you must seek advice about your circumstances. Liability is limited by a scheme approved under professional standards legislation.