Does ECPI continue on my reversionary pension even though it will put me over my transfer balance cap?

05 Sep 2023
Meg Heffron

Meg Heffron

Managing Director

When a member inherits their spouse’s reversionary pension, they might have retirement phase pensions well in excess of their own transfer balance cap for some time. That means the SMSF has a far greater opportunity for ECPI than they might expect.

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These days it is well understood that some superannuation pensions are “reversionary” – they automatically continue to someone else when the original member dies, usually the surviving spouse. While that reversionary pension will eventually count towards the surviving spouse’s transfer balance cap, it doesn’t happen immediately – there is a 12 month delay.

And importantly, even though this pension hasn’t officially been counted towards the spouse’s transfer balance cap, it’s still a normal retirement phase pension that gives rise to exempt current pension income or ECPI.

Consider Alex and Kim who both started their first retirement phase pensions in July 2023 and used up the full amount of their transfer balance caps at the time ($1.9m each).

Their pensions are reversionary to each other and they don’t have any other super in their SMSF.

Let’s say Alex dies on 1 May 2026. At the time, their pensions were worth $2m each and their fund still had no other members or accumulation accounts.

Alex’s pension will initially just continue to Kim. She’ll need to make sure she’s taken the full minimum pension by 30 June 2026 (whatever was calculated for Alex at the start of the year) as well as her own pension payments. In 12 months’ time (1 May 2027) an additional $2m (the value of Alex’s pension at the time of his death) will be added to Kim’s transfer balance cap. So before that happens she will need to make sure she’s adjusted her affairs so that she has enough “space” to absorb this additional amount. Often what people like Kim do in this situation is switch off their own pension and roll it back to accumulation phase.

But she doesn’t need to do this urgently.

In fact, she’s often better off leaving it until the very last minute because as long as she has both pensions running, both of them will count in working out the Fund’s exempt current pension for the year. This will mean a much larger tax break for Kim’s SMSF than if she re-organised her affairs earlier.

Reversionary pensions are often popular for this very reason – the surviving spouse effectively doubles up on their ECPI for up to 12 months.

But there are also a few downsides. A reversionary pension might take 12 months to show up in Kim’s transfer balance cap but it’s part of her total super balance immediately. Total super balance is important for working out whether or not someone is able to make non-concessional contributions or (in the future) is subject to the proposed new tax on those with super balances above $3m. In this case, for example, inheriting Alex’s super as a reversionary pension in May 2026 would mean Kim’s super exceeded $3m at the critical date of 30 June 2026.

That wouldn’t have been the case if Alex’s pension had been non reversionary. It would have stopped immediately on his death. It would not have any impact on Kim’s transfer balance cap OR total super balance until she used the money to start a new pension. That might not happen until the new financial year – in which case only her own super would count in checking whether or not she’s over $3m at 30 June 2026.

But wouldn’t that mean the fund would miss out on all that lovely ECPI on Alex’s pension? Actually no. These days, ECPI continues until Kim does something with Alex’s account (either starts a new pension for herself or takes out a lump sum). So in that sense it’s just like a reversionary pension. The downside is that she has to “do something” as soon as practicable – which the ATO usually feels is around 6 months. So she doesn’t have the same flexibility to do nothing for 12 months and enjoy additional ECPI for all that time.

Whether or not a pension is reversionary depends on many factors but it’s well worth understanding the ECPI rules before making any big decisions after a member who has one dies.

We have a wealth of information about ECPI in the Heffron Super Companion. Click to find out more:

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