Current as of April 2018
Last month, we spoke about Transition to Retirement Income Streams (“TRIS”). These pensions allow individuals to access their superannuation benefits prior to retirement or without having to terminate 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 now become complex not only when a member is alive but also 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? How is it taxed?
Due to all these different variables, we will only concentrate on items 2 and 6 within the context of TRIS only, for the purposes of this article. The remaining items will be discussed in future articles.
Reversionary versus Non-Reversionary Pensions
A reversionary pension is one which automatically ‘reverts’, (ie. continues) to the nominated beneficiary upon death of the pension member. Practically, this means that the pension terms to 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 do permit the reversionary beneficiary to be changed after the pension commences.
If a pension is not specified as reversionary (ie. non-reversionary), then upon death of the pension member, the superannuation interest of that pension will no longer remain in pension phase, but instead revert to 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 apply (previously tax-exempt) for accumulation phase TRIS; and
- no lump sum payments are permitted under an accumulation phase TRIS.
That is, a Retirement Phase TRIS commonly exists when the pensioner has reached age 65, or has reached 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, if the husband was aged 64 and had a reversionary Retirement Phase TRIS to his wife whom was aged 55 (born 1 April 1963), upon his passing 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 and it is expected that this will 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 where we will discuss the other issues raised above.
This newsletter has been produced by Stanley & Williamson as a service to its clients and associates. The information contained in the newsletter is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas contained in this newsletter, it is imperative you seek specific advice relating to your particular circumstances. Liability limited by a scheme approved under Professional Standards legislation.