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 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 has its advantages and disadvantages - you may wish to obtain your own independent financial advice about this.
Advantages include:
If paid to a nominated Beneficiary who is eligible to receive a pension (such as your spouse):
- 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 Beneficiary's name they will be taxed on the income and growth on the benefit received.
The Beneficiary of the Pension can later 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.
Disadvantages include:
- It requires the SMSF to continue - including the costs of operating the SMSF;
- It may result in the beneficiary exceeding their Transfer Balance Cap (and having to choose which pension they commute); and
- Death benefits can only be paid to certain types of beneficiaries.
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 2023 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 January 2024, leaving superannuation interests of $900,000. 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 January 2024. The death benefit as at 31 January 2024 is $950,000. Lisa’s Transfer Balance Account would be as follows:
| Date |
Credit |
Debit |
Balance |
| 01 August 2023 |
$1,000,000 |
- |
$1,000,000 |
| 31 January 2024 |
$950,000 |
- |
$1,950,000 |
From the above example, Lisa’s Transfer Balance Account balance as at 31 January 2024 is $1,950,000 which exceeds the Transfer Balance Cap of $1,900,000.
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 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
Assume that you have decided to take a death benefit as a pension (and that you are eligible to do so). 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 up the Transfer Balance Account 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 allows all the death super benefits to 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 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.
You Should Seek AdviceYou should obtain your own independent financial advice as to whether taking any of the above actions is appropriate to your circumstances. There will be important implications which flow from each of the above options including the comparative costs, insurance and performance of different superannuation funds.
Before you choose which option to put in place, you should seek legal accounting and tax advice. ESUPERFUND does not and cannot give you that advice.
Examples
Lisa and her spouse Barney are the members of an SMSF. Barney dies on 01 January 2024, leaving superannuation interests
of $900,000 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 on 01 August 2023. Lisa would exceed her TBC if she commenced a Death Benefit Pension with the
entire death benefits.
-
Option 2
Lisa can choose to commence a Death Benefit Pension with $400,000 of the benefits only to avoid an Excess
Transfer Balance. Her balance in the Transfer Balance Account would become $1,500,000 + $400,000 = $1,900,000
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).
You Should Seek Advice
You should obtain your own independent financial advice as to whether taking any of the above actions is appropriate to your circumstances. There will be important implications which flow from each of the above options including the comparative costs, insurance and performance of different superannuation funds.
Before you choose which option to put in place, you should seek legal accounting and tax advice. ESUPERFUND does not and cannot give you that advice.
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 2023 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 $500,000 from her own Simple Account Based Pension to her Accumulation Account
in the SMSF, thereby creating a cap space of $900,000 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 2023 |
$1,500,000 |
- |
$1,500,000 |
| 01 January 2024 |
- |
$500,000 |
$1,000,000 |
| 01 January 2024 |
$900,000 |
- |
$1,900,000 |
* Assume the death benefits are paid immediately on the deceased date.
-
Option 2
Lisa can choose to commence a Death Benefit Pension with $400,000 of the death benefits only to avoid an
Excess Transfer Balance. Her balance in the Transfer Balance Account would become $1,500,000 + $400,000
= $1,900,000 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).
You Should Seek Advice
You should obtain your own independent financial advice as to whether taking any of the above actions is appropriate to your circumstances. There will be important implications which flow from each of the above options including the comparative costs, insurance and performance of different superannuation funds.
Before you choose which option to put in place, you should seek legal accounting and tax advice. ESUPERFUND does not and cannot give you that advice.
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.