Dan: In the context of preparing for retirement, there seems to be little disagreement among experts, the most tax effective way to hold your retirement savings is in Super. For example, for most people, when you’re retired and drawing income from your Super, any capital gains made on sale of your Super assets is tax free. And income earned on the assets held in Super is tax free, and any income you draw out of the Super environment is also tax free.
Now, up until July 1, last year, it was possible for a deceased spouse to simply provide his or her Super balance in total to the surviving spouse and continue on with the tax-free status for both amounts. But sweeping changes to the Superannuation rules that took effect on the first of July, 2017, have changed the landscape.To understand what it looks like today, our Tom McVeigh, an estate planning expert and director at Murdoch’s. Tom, big changes here.
Tom: Certainly is, Dan. Probably the biggest changes we’ve had in the Super environment for ten or so years. And you’ve hit on the key part. The government probably saw that there was just too much benefit being received by retirees in the space of where they could put all their wealth and substantial amounts were going in, and yet at this tax-free status. So, they clamped down, they don’t want to see all that money being consumed by the consumer, they want a bit of the action themselves, Dan.
Dan: So, Tom, at a practical level, let’s say the situation is that a husband and wife have $2 million in a pension phase, the husband and wife each execute a binding death benefit nominations to leave their Super to the other. And soon after, the husband subsequently dies. Now, we know that prior to July 1, the wife could maintain the benefits within the Superannuation regime by simply commencing a death benefit pension, and then migrating the pension after that relevant period, which I think was known as the three month, six month rule, and provided the Super fund allowed this to take place. But what’s different now, since July 1? How does that change in that particular circumstance?
Tom: Look, it is complicated, Dan, but simplistically, a pensioner can only have $1.6 million in pension mode. So, if we use your example, if we had both husband and wife having $2 million in Super, then actually post the first of July, each of them would only have $1.6 million in a pension mode. The other $400,000 would have reverted back to what’s called an accumulation mode. So, that’s the first change that those people would have gone through.
The second change is that if the husband, as you say, passed away in, say, September of this year, then in actual fact, his wife would not be able to receive or take over the $2 million. So, what would actually happen in that simple scenario is the wife would have to revert her $1.6 million pension that she’s currently got, put that into accumulation in her Super environment. So, she’d now have $2 million in Super in an accumulation mode, and she would take on the husband’s $1.6 million reversionary pension. However, the $400,000 that’s left in the husband’s Super would have to come out. It wouldn’t be able to go across to the wife. And that’s probably the first consequence here is, there will in a lot of cases, be a need for money to come out of Super.
And we find that people’s wills may not reflect that. They may have been drawn, or have likely been drawn … the basis will look, my spouse will receive whatever I have in Super, so I don’t have to worry about that on my death. Well, that’s changed now.
Dan: So, is it the case that people should be getting some advice on this stuff given these changes?
Tom: Absolutely. Look, most people I would have thought, would have been contacted by their financial planner or accountants on this topic. And that is, in the sense of getting their pension account set up correctly, i. e., the $1.6 million and whatever else would have reverted back to accumulation. I’d be pretty confident that the majority of people would have been through that exercise. And that was a fairly intensive time for financial planners and accountant and clients, of course. But probably most of them didn’t address the issue of estate planning. And said, “Look, we’ll deal with that after the first of July. Get all this other paperwork in place,” and so now’s the time. Now’s the time that people should be seeking advice on this area.
Dan: Is there a future changes that you sort of foresee happening in this space in the next sort of 12, 18 months?
Tom: Look Dan, I think there’s always going to be change in the law. There will be. And that puts a lot of fear in people. They say, “Well look, they continually change the rules,” particularly in Super. That’s one of the sort of common messages pumped out in the marketplace. But when you sort of take a step back, the logic or the reason why the government has Super there is to make sure people save as much as they can during their working life to have a nest egg to fund their retirement, rather than the government funding that retirement. So, when you think it through logically, the government is always going to make it attractive for us to put money into Super. So, whilst the rules may change, it’s always going to be better in my view, to have your investment assets in a Super environment.