“The Magic Pudding (1918) © Norman Lindsay.”
In the good old days, superannuation was like the Magic Pudding, a much-loved classic written and illustrated by one of Australia’s greatest artists, Norman Lindsay. As each reader knows, no matter how much they get out of the story, there is, as with the Pudding itself, always something left.
Although not as entrenched in Australian folklore as Lindsay’s famous story, superannuation has become a hallmark of Australian society, testimony to our ability as a nation to provide for ourselves and our families from our own savings. A special part of our super regime has been another magic pudding – a tax-free environment in pension mode.
Political forces now swirling around Canberra and further afield have resulted in the massive changes to super due to take effect from 1 July 2017, putting a brake on previously tax-free pensions. Faced with the $1.6M cap (Transfer Balance Account) on tax-free pensions in super, to what extent can your clients ensure that their spouse and family can stay within the concessionally taxed super environment? For once they are outside it, they are at the mercy of the dreaded marginal tax rate.
How can we cook our Magic [super pension] Pudding so there’s always something left?
First, the ingredients:
- Is the recipient a dependent for super purposes?
- How is your client’s fund constituted and structured?
- What shape are your client’s pensions in?
- How do you wish to treat any current pension balances?
Now, let’s think about the directions for shaping your client’s pensions and Binding Death Benefit Nominations (BDBNs), by asking them the following questions:
- To what extent are you intending to provide for your spouse only, your dependent children and/or your non-dependent children?
- To what extent do you need to provide for any of them in an asset protective environment?
- Consider the extent to which you need to structure your affairs to avoid any likely family challenges to your plans.
- Decide whether your fund has enough cash to pay these benefits.
- Assess the extent to which the nature of the fund’s assets (heavily loaded in property?) restricts your plans.
- Estimate (to the extent possible) the value of including likely significant increases in the pension account balance within twelve months of death.
- Understand whether you should be holding life insurance policies in super.
- Consider the implications of unwinding existing pensions.
- Understand how your Super Deed treats pensions and BDBNs and the hierarchy between them.
- Think about whether a BDBN would restrict your trustee from achieving a tax-free position for a dependent spouse or minor child in the future.
Your client’s own Magic Pudding
Your client’s magic pudding will be special and different from everyone else’s.
They might want the freedom to choose how they receive payment so they will end up with a pension based on a non-reversionary nomination, directing insurance proceeds towards commencing a child pension. On the other hand, they might want a higher amount in their pension, so they will receive a reversionary pension.
It might be important that their dependent child (whether a minor or not) receives transfer balance caps from your client and their spouse which do not count towards their own balance cap in the future.
It might be a bigger pudding altogether because your client commuted a pension and accepted a new one from their deceased spouse.
Remember, your client’s pudding might be an entrée to a main course of testamentary trust pie providing additional protection for their minor children and a safe home for their insurance proceeds.
When to Bake your Pudding
Some days are better than others for baking. Between now and 1 July 2017 is an ideal time. It’s best to start by encouraging your clients to review their pensions and BDBN, checking the prevailing winds and off they go! There’s bound to be some left.
Contact one of our Partners Legal experts today on 03 8508 7800, and we can help you get started.