The introduction of the $1.6 million transfer balance cap, effective from 1 July, will impact the estate plans of many superannuation members and their death benefit beneficiaries. This is because the transfer balance cap places a limit on the amount of super that can be used to commence a pension which receives tax-free investment returns.

Importantly, advisers need to be aware that both super fund members and their beneficiaries will face steep penalties if they breach the $1.6 million transfer balance cap.

Under the current legislation, when a super fund member dies, their benefit must be ‘cashed’ and paid to their superannuation dependants (most commonly to a spouse or child). The benefit may be cashed by paying a lump sum benefit, by commencing one or more pensions or a combination of both.

From 1 July 2017, if a death benefit pension is paid, the amount that can be used to start the pension will be restricted to the transfer balance cap of $1.6 million. Any amount above the transfer balance cap must leave the superannuation system. Where there are multiple beneficiaries, each beneficiary will receive a proportionate share of the transfer balance cap.

If a beneficiary has commenced a pension themselves, their own pension and the death benefit pension they receive counts towards the $1.6 million cap. Whilst a member’s own pension may be commuted back to accumulation phase - a death benefit pension cannot be.

Case study – Harry and Meghan

Harry and Meghan both have $1 million pension accounts in their super fund as at 1 July 2017. Their transfer balance cap is currently $1 million each. Harry dies in December 2017 with an account balance of $800,000. The trustee determines that Harry’s benefit will be paid to Meghan and she has the option to receive a death benefit pension.

What are Meghan’s options?

  1. Meghan can receive an $800,000 death benefit income stream and commute $200,000 of her pension back to accumulation phase.
  2. Meghan can receive a $600,000 death benefit income stream and a $200,000 lump sum death benefit.
  3. Meghan can receive an $800,000 death benefit income stream and take a lump sum of $200,000 from her pension.
  4. Meghan can receive an $800,000 death benefit income stream and have a $200,000 excess transfer balance cap, pay excess transfer balance earnings and await the Commissioner’s release authority (or commute earlier to reduce excess transfer balance earnings).

Case study – Emma

Emma is a single mother with two children. She has an accumulation account which holds $600,000 and life insurance of $3 million. She has binding nominations to her two children in equal shares. Emma’s wish is for her children to take the maximum benefit as a pension.

How will Emma’s benefit be paid to her children?

If Emma dies her total superannuation death benefit will be paid equally to each child ($1.8 million each). Prior to 1 July 2017, each child could receive $1.8 million as a death benefit pension. However, from 1 July 2017, each child will be limited to a death benefit pension of $800,000 (half of the $1.6 million cap). The remaining $2 million ($1 million each) must leave the super system as a lump sum payment.


The introduction of the super changes from 1 July 2017 is likely to be a catalyst for many super fund members to review their super, death benefit and estate planning arrangements to ensure they are ‘future friendly’.

It is essential that clients with large super balances review their estate plans to ensure any benefits that may be forced out of the super system are directed to structures that can be controlled, such as testamentary trusts established via a Will.

For more information, please contact your financial adviser or call a member of our Estate Planning Team on 1800 882 218.