Superannuation death benefits

Technical resource

When a death benefit is paid from superannuation, whether it be from accumulation or pension phase, it must be received as a lump sum or a death benefit income stream.

Prior to 1 July 2017, when a spouse received a death benefit pension, it was industry practice for them to commute the pension and roll the benefit back to accumulation if it was outside the prescribed period. This was generally the later of:

  • three months from grant of probate, or

  • six months from date of death.

The ATO views this industry practice as a breach of the compulsory cashing requirement that applies to death benefit pensions. However the ATO issued Practical Compliance Guideline 2017/6 allowing for relief in relation to this practice for commutations which took place before 1 July 2017.

From 1 July 2017, if a death benefit is taken as an income stream, it can’t be commuted and rolled back to accumulation at any stage. It can be commuted and rolled over to another fund if the beneficiary is eligible to receive a death benefit income stream.

Once the death benefit is rolled over to the new fund, it must immediately be taken as a death benefit income stream or a lump sum and can’t be held in accumulation phase.

If a death benefit is rolled over and received in another super fund, the tax treatment for the beneficiary won’t change. This provides a significant benefit to clients who hold insurance and accumulated money within super funds that don’t pay death benefit income streams.

Transfer balance cap

Since 1 July 2017, the transfer balance cap limits the total amount a person can roll over to superannuation retirement phase income (RP) streams. The transfer balance cap is currently $1.6million except where the person has made structured settlement contributions. The transfer balance cap also applies to recipients of death benefit pensions.

A death benefit pension may be payable to a:

  • spouse including de facto and same sex)

  • person who was financially dependent on the deceased

  • person who had an interdependency relationship with the deceased person, and

  • child (including adopted, step and ex-nuptial) who is:

    - under age 18
    - over age 18 with disability, or
    - aged18 to 24 and were financially dependent on the deceased just before the deceased passed away.

Death benefit income streams if paid to a dependant other than a child

Superannuation death benefits received as a pension count towards the receiving beneficiary’s transfer balance account. If a client has a superannuation RP income stream and therefore, has a transfer balance account and they receive a death benefit pension, the total rolled over to their RP income streams cannot exceed the client’s unused transfer balance cap amount.

Where the recipient spouse will exceed the transfer balance cap upon receiving a death benefit income stream, they can roll their own pension back to accumulation if they want to retain the money in superannuation. Alternatively, they could either receive the death benefit as a lump sum or commute their own pension as a lump sum and then receive the death benefit as an income stream.

Example 1

Harry and Jemima were married. On 1 July 2017, they both commenced account based pensions with $1.6 million each.

On 1 January 2020, Harry passed away. At this time, both of their account based pensions were valued at $1.5 million. If Jemima received his account based pension as a death benefit income stream whilst still holding her account based pension, she would have exceeded her transfer balance cap.

Jemima commuted and rolled back her account based pension of $1.5 million to accumulation. She then commenced a death benefit pension from the proceeds of Harry’s $1.5 million death benefit account. This was within her transfer balance cap.

Example 2

Tim and Janine were married on 1 July 2017, they both commenced account based pensions with $1.6 million.

On 1 January 2020, Tim passed away. At this time, both of their account based pensions were valued at $1.7 million. If Janine received his account based pension as a death benefit income stream whilst still holding her account based pension, she would exceed her transfer balance cap.

Janine commuted and rolled back her account based pension of $1.7 million to accumulation. This reduced Janine’s transfer balance to minus $100,000. She then received the death benefit account based pension of $1.7 million. This was within her personal transfer balance cap of $1.6 million.

Reversionary pensions vs non reversionary pensions

The starting balance of a non-reversionary death benefit pension counts towards the transfer balance cap of the recipient as soon as the death benefit pension commences.

On the other hand, when a reversionary death benefit pension is received the balance of the pension at the time of death will be a credit to the beneficiary’s transfer balance account 12 months after the death of the original pensioner. This provides the death benefit recipient time to work out how they want to receive the death benefit and move some of their own pension account back to accumulation phase if necessary.

Death benefit income streams paid to a child

A death benefit income stream (child pension) can be received by a child of the deceased as long as the child:

  • is under age 18

  • is between ages 18 and 24 and they were financially dependent on the parent , or

  • has a permanent disability.

Child pensions can only be commenced for an amount up to the available transfer balance cap of the minor beneficiary. This is referred to as a ‘transfer balance cap increment’.

The amount which can be paid to an eligible child without exceeding the child’s transfer balance cap increment depends on whether or not the parent had a transfer balance account (TBA), which in turn depends on whether or not the parent had already commenced a RP income stream.

When the deceased parent does not have a transfer balance account

If a death benefit income stream is paid to a child or children from the parent’s accumulation benefits, and the parent does not have a transfer balance account then the child/ren can receive an income stream for an amount up to their proportion of the death benefit multiplied by the general transfer balance cap. This means that the total amount rolled over to their income streams cannot exceed the general TBC at that time.

A transition to retirement income stream does not count towards a person’s transfer balance cap. For this purpose, it is considered to be in accumulation phase and is not a retirement income stream.

Example 3

Janine was a single mother who had $2 million in super accumulation benefits. She passed away on 1 August 2019 when the general transfer balance cap equalled $1.6 million. She nominated her two children, Angela (age 12) and Marcus (age 15) to receive her death benefit equally (50% each).

The children can receive a death benefit pension for $800,000 each ($1.6 million x 50%) without exceeding their TBC. The remaining amount of $400,000 needs to be paid out as lump sum death benefits.

Example 4

Bill is aged 57 and had $900,000 in a transition to retirement income stream. He had a de-facto spouse and also one child from a former marriage, who is aged 16.

He nominated his child to receive his entire super death benefit. He passed away on 1 October 2019. His child was able to receive a death benefit income stream for $900,000 without exceeding the TBC.

When the deceased parent does have a transfer balance account

If the parent had a TBA at the time of their death and a death benefit income stream is paid to a child or children, then the child/ren of the deceased parent can receive a death benefit income stream up to their proportionate share in the deceased parent’s RP income streams.

They cannot receive any amount from accumulation as a death benefit pension.

Any insurance proceeds paid from super will always be deemed to be sourced from the accumulation phase. This means that a child can only receive the insurance benefit as a lump sum in the case where the deceased parent had a transfer balance account.

Example 5

David is age 62 with two children. He had $1 million in an account based pension. He also had $500,000 in accumulation. He passed away on 1 September 2019. He had nominated his two children, Adrian and Melissa to receive his superannuation benefits. Adrian was nominated to receive 60% whilst Melissa was to receive 40% of the total benefits. Adrian was able to receive a death benefit income stream for $600,000 while Melissa was able to receive a death benefit income stream for $400,000. Adrian and Melissa had to receive the amount of $500,000 from accumulation as lump sum benefits.

Example 6

Mary passed away at age 52 on 1 December 2019. Mary had previously commenced an account based pension on 1 July 2017 with $1.6 million due to being totally and permanently disabled. At her date of death, it was valued at $1.7 million and the general TBC was $1.6 million. She had no other money in accumulation. She left her superannuation death benefit to her 14 year old daughter, Amelia. Amelia was able to receive the entire amount as a death benefit pension.

Where both parents pass away

Where both parents of a child pass away, the child’s transfer balance cap increment is the sum of the amounts worked out in relation to each parent.

If a child receives a death benefit income stream from one parent and subsequently receives another death benefit income stream from another parent later, the child’s transfer balance cap increment is the total of the income stream benefits they receive from all parents, provided:

  • the death benefit income streams are paid from the parent’s income stream benefits, if the parent had a TBA, or

  • from accumulation phase if the parent didn’t have a TBA and the amount is the child’s proportionate share of the death benefit multiplied by the general TBC.

Example 7

On 1 September 2019, Emma (aged 16) receives a death benefit income stream of $1.6 million as her father passed away. The income stream is within Emma’s transfer balance increment as her father had $1.6 million in an account based pension when he passed away.

On 1 January 2020, Emma’s mother passes away. Emma’s mother had $500,000 in accumulation phase only. As Emma’s mother did not have a TBA, Emma can receive the amount of $500,000 as a death benefit income stream and this will be within her own transfer balance cap increment.

Image showing what happens when a parent passes away
Image showing what happens when second parent passes away

^ This is regardless of whether this amount is over the general TBC amount.

* This is regardless of how much the child already has in income streams if the income stream/s were received as a result of the death of their other parent.

Advice considerations

The changes introduced on 1 July 2017 mean that many clients, in particular those with more than $1.6 million in super, may need to revise how their superannuation death benefits will be paid.

Depending on their circumstances and the amount of money they have in super, clients should consider:

  • how to leave their death benefit to their spouse and children to keep as much money in the super environment

  • having a reversionary beneficiary in place instead of a binding death benefit nomination

  • having some of their death benefit paid out as a lump sum and held in a family trust

  • starting an account based pension with their maximum transfer balance cap amount before they die so that they can leave as much as possible to their child/ren as death benefit pensions.

Next: Work test exemption for recent retirees aged 65 to 74

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Individuals aged between 65 and 74 who have recently retired, may be eligible to make additional voluntary contributions to their super. Learn about eligibility and requirements at BT Academy.
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