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Succession planning and the transfer balance cap

The superannuation transfer balance caps have been problematic for SMSF members who don’t take careful consideration when succession planning.

Failure to understand the impact of these transfer balance cap changes can have on your finances may force you to transfer large amounts of money out of your super.

The transfer balance cap of $1.6 million that was introduced as of 1 July 2017 limits the amount of superannuation that can be transferred into an individual’s retirement phase. The cap incorporates all accounts the individual holds balances in.

SMSF members ought be weary of the scenario in which a SMSF is paying two pensions, one to each party of a couple where both parties are receiving money under the transfer balance cap. When one of the spouses die, the remaining spouse could be in breach of the transfer balance cap because now they are the sole beneficiary of more than $1.6 million.

Luckily, if you take time to plan carefully how to avoid the above limitations, you can have control over where (and to who) your super will go to when you pass.

Consider the following:

Accumulation vs pension phase
The new transfer balance cap rules state that, at any given time, individuals cannot have more than $1.6 million in their pension phase. The money in the pension phase is taxed at zero percent; the money in the accumulation phase is taxed at 15 per cent. If you are already in the pension phase, and are with a spouse also in the pension phase, it is fruitful to think ahead as to what will happen to the money when one of you passes. Perhaps looking into what investments you can make now would be wise, particularly given that investment properties held for a period of longer than 12 months are taxed at a rate of 10 per cent.

Nominations
One option is to execute a binding death benefit nomination, which allows an individual to nominate who they would like their death benefits to be paid to. When preparing the BDBN, an individual can elect where their money goes and the trustee of their estate is bound to carry out these wishes. The other option is to execute a non-binding death benefit nomination, which allows the trustee some flexibility as to where they place your money. This is a good option if your wishes for your money are not as tax effective as possible; the trustee has the option to vary where you wanted the money to be placed.

In addition, when succession planning, it is important to remember that superannuation is not an asset that forms part of an individual’s estate; there are limitations as to who is a beneficiary of another’s superannuation. An individual must be a dependent of the deceased or a legal personal representative. If an individual fits this criteria, there are only two ways that they can be paid the benefit; through an income stream or via a lump sum.

To ensure you are not leaving your spouse or children the stress of the repercussions of breaching the transfer balance cap when you pass, speak to one of our accountants to establish the best possible plan for your estate.

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Protect yourself from early super release scams

August 7, 2018

When it comes to protecting your nest egg, avoid getting caught out by a promoter of an illegal early release super scheme.

Early release super scheme scams will involve a promoter contacting you and offering to help you access your super early. They usually target individuals under significant financial pressure or those who are not knowledgeable about super laws and the repercussions and penalties involved in illegally accessing your super.

You can only access your super when you meet a condition of release.

Generally, when you:
– Are 65 years old (even if you have not yet retired).
– Reach your preservation age and retire.
– Reach your preservation age and begin a transition to retirement income stream while still working.

There are special circumstances where you may be able to access your super early.

These special circumstances include:
– Severe financial hardship
– Temporary or permanent incapacity
– Compassionate grounds
– Temporary residents leaving Australia
– Super death benefits (inheriting super)
– Super less than $200
– Terminal medical condition

To avoid falling for an illegal early super release scam, be wary if the promoter:
– charges high fees and commissions;
– requests identity documents;
– claims you can access your super and put the funds towards whatever you wish;
– and tries to persuade you to transfer or rollover your super from your existing fund to a self-managed super fund (SMSF) in order to access your super before you are legally entitled.