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Death Benefit Pension


Upon the death of a member, the deceased member’s Super Benefit must be paid to the nominated beneficiaries (if there is a Death Benefit Agreement in place) or by the remaining Trustees at their discretion (if there is no Death Benefit Agreement in place) as soon as practicable.

If the payment option of the Death Benefit is “Pension” as per the Death Benefit Agreement / Trustees discretion, a Death Benefit Pension would be commenced for the Beneficiary in the SMSF. Please be advised that only dependants of the deceased member can receive death benefits in the form of a “Pension” and the Beneficiary must also be a member of the SMSF.

Dependants of the Deceased

You are a dependant of the deceased if at the time of their death you were:

  • their spouse or de facto spouse, including different or same sex;
  • a former spouse or de facto spouse, including different or same sex;
  • a child of the deceased under 18 years old;
  • in an interdependency relationship with the deceased;
  • any other person dependant on the deceased.

 
 
Death Benefits as a Pension instead of a Lump Sum

Receiving death benefits as a Pension instead of a Lump Sum to a nominated Beneficiary has some specific advantages over paying a Lump Sum, namely:

  • Your Super Benefit will not leave the super environment on your death. This is very important because if it does get paid out as a Lump Sum, the Beneficiary may not be able to contribute it back into super again given the Contribution Limits that apply.
  • All earnings and investment growth will continue to be tax free. If paid out as a Lump Sum and invested in the Beneficiaries name they will be taxed on the income and growth on the benefit received.
  • Importantly even if left as a Pension, the Beneficiary of the Pension will be able to cash out all or part of the benefit as a Lump Sum payment. The tax implications of accessing a Lump Sum from the Death Benefit Pension will be the same as if the Super Benefit was received as a Lump Sum in the first instance.

 
 
Death Benefit Pension and Transfer Balance Cap

A Death Benefit Pension is essentially a Simple Account Based Pension, therefore it is subject to the Transfer Balance Cap (TBC) . When a death benefit is being or to be paid to you (as the Beneficiary), you must consider your Transfer Balance Cap: namely, whether paying a Death Benefit Pension will cause you to exceed your Transfer Balance Cap.

When a Death Benefit Pension is commenced for you, the value of the Death Benefit Pension is counted towards your TBC (i.e. credited into your Transfer Balance Account). The credit occurs at the date the Pension is commenced, and the credit amount is the value of the Death Benefit Pension on the Pension commencement date.

Example

On 01 August 2017 Lisa commences a $1,000,000 Simple Account Based Pension and Lisa has a transfer balance of $1,000,000. Lisa’s spouse, Barney, dies on 01 July 2018, leaving superannuation interests of $700,000. According to the Death Benefit Agreement, Barney’s super benefits should be paid to Lisa in the form of a Pension. Lisa decides to commence a Death Benefit Pension with the entire death benefits on 31 July 2018. The death benefit as at 31 July 2018 is $750,000. Lisa’s Transfer Balance Account would be as follows:

Date Credit Debit Balance
01 August 2017 $1,000,000 - $1,000,000
31 July 2018 $750,000 - $1,750,000

From the above example, Lisa’s Transfer Balance Account balance as at 31 July 2018 is $1,750,000 which exceeds the Transfer Balance Cap of $1,600,000.

 
 
Breach of the Transfer Balance Cap

If the commencement of the Death Benefit Pension would result in a breach of your Transfer Balance Cap, you would have an Excess Transfer Balance.

The ATO will estimate the notional earnings on your Excess Transfer Balance and require you to remove the excess (including notional earnings) from the retirement phase account. You will also be liable to pay 15% tax on the notional earnings attributable to the excess capital for the first breach and 30% tax for the subsequent breaches.

For more information on the consequences of an Excess Transfer Balance, please click here.

 
 
Strategies on Managing your Death Benefit Pension

To avoid the above disastrous situation, careful planning ahead of time is required to ensure you will not exceed your Transfer Balance Cap when you receive any Death Super Benefit in the form of a “Pension”. Generally, this requires the following steps:

Step One: Work out the remaining cap space in your Transfer Balance Account if you have an existing Retirement Phase Pension Income Stream. You can view your Transfer Balance Account Balance using the ATO online services through myGov or contact the ATO on 13 10 20 directly.

Step Two: Estimate the balance of the deceased member’s super benefits as at the current date.

Step Three: Determine if the balance of the deceased member’s super benefits (obtained in Step Two) is within the remaining cap space of your Transfer Balance Account (obtained in Step One). If you have sufficient cap space in the Transfer Balance Account, you can commence the Death Benefit Pension with the entire death super benefits.

Step Four: If the balance of the deceased member’s super benefit exceeds the remaining cap space of your Transfer Balance Account, you must take necessary steps to avoid an Excess Transfer Balance. You have a few options and each option is discussed below:

How to avoid an Excess Transfer Balance

The following options are available to avoid an Excess Transfer Balance:

Option One: Reduce the balance in your Transfer Balance Account first (if you have an existing commutable Retirement Phase Pension) and then top it up with the Death Benefit Pension

If you have an existing Retirement Phase Pension Income Stream, you can transfer your member balance from your existing Pension to an Accumulation Account (this is called Pension Rollback or Pension Commutation). This process will create a debit in your Transfer Balance Account and thereby creating a cap space in your Transfer Balance Account. You can then commence the Death Benefit Pension which will in turn result in a credit to your Transfer Balance Account.

This strategy has some advantages since all the death super benefits can be retained in the SMSF. The amount rolled back to the Accumulation Account will be taxed at up to 15%. This tax rate may create tax savings if your marginal tax rate is higher.

We caution however this strategy is applicable only if your existing Pension is a commutable Retirement Phase Pension. Not all Retirement Phase Pensions are commutable. We advise that all Pensions commenced through ESUPERFUND are commutable. However, if you have a Retirement Phase Pension with another superannuation fund (e.g. a Defined Benefit Pension), please contact the Super Provider directly to confirm whether rollback is allowed.

Option Two: Commence a Death Benefit Pension with only PART of the death benefits and the remaining death benefits are paid out of your SMSF as a Lump Sum.

If you do not have an existing Retirement Phase Pension Income Stream OR if your existing Pension is non-commutable and provided you have a cap space in the Transfer Balance Account, you can commence the Death Benefit Pension with PART of the death super benefit until you reach the Transfer Balance Cap.

The remaining death benefits must be paid to you out of your SMSF as a Lump Sum. We caution that you cannot retain any death super benefits in the super environment unless the balance is used to commence a Death Benefit Pension. Given the amount withdrawn is invested outside the super environment, any income and growth earned will be taxed at your marginal tax rate in your personal tax return.

Option Three: Withdraw all death benefits out of your SMSF as a Lump Sum

If you have reached the Transfer Balance Cap and your existing Pension is non-commutable, you only have one option left, which is to withdraw all death benefits out of your SMSF as a Lump Sum.

You may also choose this option if you do not wish to retain any Death Benefits in the super environment.


Examples

Lisa and her spouse Barney are the members of an SMSF. Barney dies on 01 July 2018, leaving superannuation interests of $700,000 in the SMSF. According to the Death Benefit Agreement, Barney’s super benefits need to be paid to Lisa in the form of a Pension.

Scenario One: You do not have any existing commutable Retirement Phase Pensions

Assuming Lisa already has a non-commutable Retirement Phase Pension in another Superfund with a value of $1,500,000 that counted towards her Transfer Balance Cap. Lisa would exceed her TBC if she commenced a Death Benefit Pension with the entire death benefits.

  • Option 1

    Since Lisa’s existing Retirement Phase Pension is non-commutable, Option One discussed above cannot be applied in this example.

  • Option 2

    Lisa can choose to commence a Death Benefit Pension with $100,000 of the benefits only to avoid an Excess Transfer Balance. Her balance in the Transfer Balance Account would become $1,500,000 + $100,000 = $1,600,000 after commencing the Death Benefit Pension. The remaining death benefits need to be withdrawn by Lisa out of the SMSF as a Lump Sum immediately.

  • Option 3

    Lisa can choose to withdraw all death benefits out of the SMSF as a Lump Sum. As a result, her current balance in the Transfer Balance Account would remain unchanged (i.e. $1,500,000).

  • Comparison of the Results
    Option Amount in Pension Amount withdrawn as Lump Sum
    Option 1 N/A N/A
    Option 2 $1,600,000 $600,000
    Option 3 $1,500,000 $700,000

    * Assume the death benefits are paid immediately on the deceased date.

    By choosing option 2, Lisa maximises the balance of her Retirement Phase Pension accounts and therefore any earnings on assets supporting these accounts will be tax exempt. In addition, she minimises the amount which must be paid out of the superannuation system as a Lump Sum.

Scenario Two: You have existing commutable Retirement Phase Pensions

Assuming Lisa already has a Simple Account Based Pension (commutable Retirement Phase Pension) which is commenced in the SMSF on 01 August 2017 with a value of $1,500,000 that counted towards her Transfer Balance Cap. Lisa would exceed her TBC if she commenced a Death Benefit Pension with the entire death benefits. The following options are available for Lisa to avoid an Excess Transfer Balance:

  • Option 1

    Lisa can choose to commute $600,000 from her own Simple Account Based Pension to her Accumulation Account in the SMSF, thereby creating a cap space of $700,000 in her Transfer Balance Account. She then can commence a Death Benefit Pension with the entire death benefits, without breaching the TBC.

    Her balance in the Transfer Balance Account would be as follows.

    Date Credit Debit Balance
    01 August 2017 $1,500,000 - $1,500,000
    01 July 2018 - $600,000 $900,000
    01 July 2018 $700,000 - $1,600,000

    * Assume the death benefits are paid immediately on the deceased date.

  • Option 2

    Lisa can choose to commence a Death Benefit Pension with $100,000 of the death benefits only to avoid an Excess Transfer Balance. Her balance in the Transfer Balance Account would become $1,500,000 + $100,000 = $1,600,000 after commencing the Death Benefit Pension. The remaining death benefits need to be withdrawn by Lisa out of the SMSF as a Lump Sum immediately.

  • Option 3

    Lisa can choose to withdraw all death benefits out of the SMSF as a Lump Sum. As a result, her current balance in her Transfer Balance Account would remain unchanged (i.e. $1,500,000).

  • Comparison of the Results
    Option Amount in Pension Amount in Accumulation Amount withdrawn as
    Lump Sum
    Option 1 $1,600,000 $600,000 $0
    Option 2 $1,600,000 $0 $600,000
    Option 3 $1,500,000 $0 $700,000

    * Assume the death benefits are paid immediately on the deceased date.

    By choosing option 1, Lisa maximises the balance of her Retirement Phase Pension accounts and therefore any earnings on assets supporting these accounts will be tax exempt. With option 1, she also minimises the amount which must be paid out of the superannuation system.

 
 
Contact ESUPERFUND

If you are currently a client of ESUPERFUND and a member of the SMSF passed away, please contact ESUPERFUND via the Client Portal Inbox and provide a certified copy of the death certificate.

If you wish to implement a Death Benefit Agreement to ensure that your Super Benefit is distributed as a “Pension” to your Beneficiary, please click here to login to the ESUPERFUND Client Portal and complete the "Death Benefit Agreement" Application.

 
 
Seek Professional Advice from a Financial Adviser

Estate planning is complex and might affect beneficiaries significantly. ESUPERFUND is a no advice model and does not provide financial advice to clients. We recommend that you seek professional advice from a financial adviser. A licensed financial adviser will consider your personal situation and make a recommendation suitable to your financial needs.

It should always be remembered that Trustees are legally responsible for all the decisions made even if you obtain advice from a Financial Planner. Whilst a Financial Professional can provide advice and assistance you are ultimately responsible for the Fund.