Don’t let the super reforms unravel your estate planning - MGD
4 April 2017

To keep up to date with more articles like this, join Connect the Dots.  

There is now only 13 weeks left before the Government’s new super reforms kick in. This means, there is only 13 weeks left to rethink your super strategy and make any necessary changes to ensure you get the best financial outcomes and avoid potential penalties. Time is running out.

If you, like many Australians, have structured your super to deliver the best possible estate planning outcomes, then it is recommended you engage in some advance planning to ensure the new reforms do not unravel your pre-prepared strategies come 1 July 2017.

Estate planning is the process of arranging how your wealth or assets will be distributed on your death to your beneficiaries. Under law, death triggers a compulsory payment situation which means the deceased’s pension cannot remain in their superannuation pension account and must be paid as a reversionary pension, a new pension or a lump sum benefit. Furthermore, it cannot be transferred to the accumulation account of the recipient (but can be transferred to a spouse’s pension account as a reversionary pension).


Reversionary Pensions

Perhaps the most common estate planning strategy is reversionary pensions which remain valid until death or the death of a spouse, and the benefit is guaranteed to pass on to the surviving spouse. From 1 July, retirement phase pensions cannot exceed $1.6 million (however, they can grow through investment earnings without any restrictions). For reversionary pensions, the challenge will be when the account based pension is passed on to a spouse after death and the total combined balance exceeds $1.6 million. If this is the case, the excess will need to be removed from the fund and paid out as a lump sum benefit, which means assets will need to be sold.

The good news is the Government has allowed a 12 month grace period for reversionary pensions meaning a reversionary death benefit pension is not counted towards the spouse’s transfer balance cap until 12 months after the date of death. This provides time to carefully consider any estate planning considerations.

What can you do? If you have a reversionary pension, and you know the combined total of your pension and your spouse’s pension exceeds $1.6 million, what can you do? One potential strategy is to use the reversionary pension as a way of adding to your concessionally taxed super. This means, you commute part/all of your own retirement pension back into an accumulation account where the future investment earnings will be taxed. By doing so, you have essentially created space in your pension account for your spouse’s reversionary pension. Another option is to start looking outside superannuation. Typically overlooked in the past due to the far more generous tax breaks offered by superannuation, insurance bonds are a simple, tax-effective investment vehicle that can be the foundation for an effective estate planning strategy. There are no balance caps in insurance bonds and, in the event of death, the beneficiary receives the proceeds tax-free. For more information on this, have a look at The next best tax structure outside superannuation.


Non-Reversionary Pensions and Death Benefits Payable to Children

If the deceased’s pension is non-reversionary, the death benefit pension is paid to the surviving spouse and there is no 12-month grace period. It is also worth noting that children under 18 (or up to 24 who are financially dependent on the deceased), or a child of any age with a disability can receive the death benefit pension regardless of how much has accumulated in the account which means that even if the deceased’s pension exceeds the $1.6 million balance cap, the child can maintain the pension account until they turn 25 (when it needs to be paid out as a lump sum death benefit) or until the pension is exhausted (if received by a child with a disability). When the death benefit is paid to anyone who is not a financial dependent (such as an independent adult child or your legal personal representative/estate executor), it must be paid as a lump sum. In these scenarios, careful advanced financial estate planning should occur with your financial adviser to save tax, as up to 17% tax could be payable on the taxable component of your total death benefit depending on who the ultimate recipient is.

With only 13 weeks left until the super reforms are implemented, it is imperative to take the time to rethink your superannuation strategies, including your estate plan, to ensure you and your family get the best financial outcomes and avoid potential penalties. If you would like to chat about your current superannuation and estate planning strategies, and what can be done in light of the changes, please do not hesitate to get in touch with our team of specialists on (07) 3391 5055 or email us at

Disclaimer: This article contains general information only and is not intended to constitute financial product advice. Any information provided or conclusions made, whether express or implied, do not take into account the investment objectives, financial situation and particular needs of an investor. It should not be relied upon as a substitute for professional advice.