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  • Defined benefit income streams

    Some defined benefit income streams are treated differently for transfer balance cap purposes. This includes death benefit income streams that are also defined benefit income streams. They will have a special value for transfer balance cap purposes.

    The rules of your fund may specify that your death benefit income stream reduces if your circumstances change. For example:

    • when a reversionary defined benefit pension is paid to a surviving spouse or a beneficiary – in some cases, the first payment is the full amount of the payment that was made to the deceased, whereas the second and all subsequent payments are a proportion of the full entitlement. As a result, the annualised payment is based on an inflated figure.
    • when a reversionary defined benefit pension paid to a surviving spouse is calculated by reference to the deceased’s dependent children and the surviving spouse’s entitlement is reduced as the children cease being dependent (generally at 18 or 25 years depending on their circumstances).

    You may be entitled to a debit in your transfer balance account if your death benefit income stream reduces because of a change in your circumstances.

    See also:

    Examples

    Example 1:

    Jack had a reversionary super income stream valued at $1 million at the time of his death on 1 September 2015. Upon his death, the super income stream reverted to his sister who was in an interdependency relationship with him. Jill had commenced her own account-based income stream on 1 January 2015, valued at $1.7 million.

    At the end of 30 June 2017:

    • the value of Jack's reversionary death benefit income stream is $800,000
    • the value of Jill’s account-based income stream has reduced to $1.6 million.

    Jill has to take action to make sure she does not exceed her personal transfer balance cap.

    Jill partially commutes $800,000 of her account-based income stream on 1 July 2017, retaining it in the accumulation phase, and continues receiving the reversionary death benefit income stream valued at $800,000. Jill still has her original account-based income stream (now with a reduced value of $800,000) in the retirement phase, and has $800,000 in accumulation phase.

    On 1 July 2017, Jill starts to have a transfer balance account and a transfer balance credit of $800,000 arises for the reversionary death benefit income stream. A transfer balance credit also arises for Jill’s account-based income stream of $1.6 million.

    A transfer debit also arises on that day for the partial commutation of $800,000, bringing Jill’s transfer balance down to $1.6 million.

    End of example
     

    Example 2:

    Larissa commenced a super income stream on 1 October 2000. Larissa died on 1 January 2017. Larissa’s super income stream automatically reverts to her spouse Brad upon her death.

    At the end of 30 June 2017, the value of the reversionary death benefit income stream is $1 million.

    On 1 January 2018, Brad starts to have a transfer balance account and a transfer balance credit of $1 million arises. The credit occurs 12 months from the day that the reversionary death benefit income stream first became payable to Brad.

    The transfer balance credit is equal to the value of the reversionary income stream at the end of 30 June 2017 ($1 million) and not the value when the credit arises (1 January 2018).

    End of example

    Example 3:

    On 15 April 2018, Ivan dies. Upon Ivan's death, his super income stream reverts automatically to Sasha.

    The value of the super death benefit at this time is $1.1 million. Sasha’s transfer balance account will be credited with $1.1 million on 15 April 2019. This is 12 months from the day that the reversionary death benefit income stream first became payable.

    Sasha chooses to partially commute her own super income stream and transfers $700,000 to her accumulation account on 15 April 2019. This ensures her transfer balance account does not go above her personal transfer balance cap.

    Alternatively, Sasha could partially commute the reversionary death benefit income stream, but she would have to pay the commuted amount as a lump sum out of the super system because the death benefit can't be retained in accumulation phase.

    End of example

    Example 4:

    Terence commenced a non-reversionary super income stream worth $1.4 million on 1 October 2000. Terence died on 1 January 2017. At the time of his death, he also had $350,000 in an accumulation account.

    Aurelia is Terence's spouse and the only beneficiary. She is paid a non-reversionary death benefit income stream which commenced on 15 January 2017. It is made up of Terence's income stream, valued at $1 million when he died, and the $350,000 in his accumulation account.

    At the end of 30 June 2017, the value of her death benefit income stream has reduced to $1.3 million.

    On 1 July 2017, Aurelia starts to have a transfer balance account, and a transfer balance credit arises for the death benefit income stream of $1.3 million. This means that, on 1 July 2017, Aurelia is under her personal transfer balance cap.

    End of example
     

    Example 5:

    Nathaniel commences a non-reversionary super income stream worth $1.4 million on 1 October 2017. Nathaniel dies on 1 January 2018. At the time of his death, the value of his super income stream is $1.3 million. Nathaniel has no other super interests.

    Malena is Nathaniel's spouse and only beneficiary and is entitled to all of his remaining super interest. During the period between Nathaniel's death and when the death benefit income stream starts being paid to Malena, investment earnings of $1,000 accrues.

    The value of the death benefit income stream, when it commences on 15 June 2018, is $1,301,000.

    On 15 June 2018, Malena starts to have a transfer balance account. A transfer balance credit of $1,301,000 arises for the death benefit income stream.

    Malena can start another super income stream, valued up to $299,000 without exceeding her personal transfer balance cap.

    End of example
     

    Example 6

    Kirsty has her own account based pension. When she started this pension she got a credit of $900,000 in her transfer balance account.

    On 10 May 2020, Kirsty’s husband Ben passes away and Kirsty starts to receive a reversionary defined benefit pension. At the time Ben passed away, he was receiving fortnightly pension payments equal to an annual entitlement of $80,000. This annual entitlement equates to a special value of $1,280,000.

    Under the rules of the fund:

    • the first six payments to the reversionary beneficiary (Kirsty) must equal the previous entitlement from the original recipient
    • the seventh and subsequent payments are reduced to half of the previous entitlement
    • the same pension is payable to the reversionary beneficiary; it's merely the amount of the periodic payments that have changed.

    Accordingly, the first six fortnightly payments Kirsty will receive remain the same as if Ben was receiving them. However, on 17 August 2020, Kirsty will receive a reduction in the reversionary fortnightly income.

    As the pension was indexed on 1 July 2020, the annual entitlement of the pension just before the reduction had increased to $80,500, which equates to a special value of $1,288,000.

    The reduction will reduce the annual entitlement of $40,250, which equates to a special value of $644,000. On 30 May 2020, the fund reports the original special value of $1,280,000 reversionary income stream (being the special value of the defined benefit pension when Kirsty receives it). As the pension is a reversionary income stream, the credit will not arise in her transfer balance account until 10 May 2021.

    On 22 August 2020, the fund will report a debit of $644,000. This is calculated as the difference between the special value of the income stream just before the reduction and the special value just after the reduction (i.e. $1,288,000 less $644,000 = $644,000).

    This debit will arise in Kirsty’s transfer balance account with an effective date of 17 August 2020.

    The balance of Kirsty’s transfer balance account on 17 August is reduced to $256,000 (the $900,000 original credit from her own pension less the $644,000 debit reflecting the reduced value of her reversionary defined benefit pension).

    On 10 May 2021, the credit of $1,280,000 will arise from the reversionary income stream. Kirsty’s transfer balance account balance is now $1,536,000 and Kirsty will not have an excess transfer balance.

    End of example
     

    Example 7

    Rachel started to receive a reversionary income stream on 2 February 2019 on the death of her spouse. The credit in her transfer balance account arising from the special value of this pension was $1,000,000.

    Rachel has a dependent child, Sebastian, and under the rules of her fund:

    • the pension paid to Rachel will reduce when Sebastian turns 18 on 4 March 2020
    • the same pension is payable to the reversionary beneficiary and it's merely the amount of the periodic payments that have changed.

    Rachel does not check her transfer balance account and, on 1 January 2020, starts her own account based pension valued at $620,000 when she retires.

    Rachel forgot that her reversionary income stream would be credited to her transfer balance account on 2 February 2020. On 4 February 2020, Rachel received an excess transfer balance determination informing her that she has an excess transfer balance of $20,200 (the $20,000 excess + $200 in excess transfer balance earnings which is credited to her transfer balance account).

    Rachel is required to commute the excess and earnings prior to 4 May 2020.

    On 4 March 2020, Sebastian turned 18 and the fund reports a debit of $258,000 for Rachel. This means Rachel will get a debit in her transfer balance account of $258,000 on 4 March 2020.

    As Rachel’s pension was indexed on 1 July 2019, the special value of the income stream just before the reduction was $1,008,000. The special value of the pension after the reduction will be $750,000. Her fund has calculated the debit as the difference between the special value based on the earlier annual entitlement and the special value based on the later annual entitlement (i.e. $1,008,000 less $750,000= $258,000).

    On 10 March 2020, Rachel receives an excess transfer balance tax notice of assessment showing tax on her excess transfer balance earnings and that the debit of $258,000 has been applied to her transfer balance account. Rachel will be required to pay the excess transfer balance tax.

    The debit arising from the reduction in value of the reversionary income stream on 4 March 2020 will reduce the balance of her transfer balance account to $1,362,200 ($1,000,000 + $620,000 + $200 - $258,000) which is below her personal transfer balance cap.

    Rachel:

    • will need to pay excess transfer balance tax on the excess transfer balance earnings which will have accrued between 2 February 2020 and 4 March 2020
    • won't be entitled to any indexation of her personal transfer balance cap.
    End of example

    See also:

      Last modified: 04 May 2020QC 54352