Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 364

Common confusions with death benefit pensions

There are a number of issues regarding the payment of death benefits that are widely misunderstood. In this article, we review the types of accounts that can pay a death benefit as a pension, minimum pensions, rolling over death benefit pensions and tax treatment.

Death benefit pensions

A common misconception is that a death benefit can only be paid as a pension if the deceased was in pension phase. However, provided that the super fund rules allow, a death benefit may be paid as a lump sum, one or more pensions or a combination of both a lump sum and pension benefits. This ability applies regardless of whether the death benefit is being paid from an accumulation account, a non-reversionary pension or a reversionary pension.

Death benefits can only be paid as a pension to a death benefit dependant, including a spouse, a financial dependant, someone in an interdependency relationship or a child of the deceased. However, where the beneficiary is a child of the deceased, a pension may only be paid if the child:

  • is under age 18
  • is age 18 to 25 and financially dependent on the deceased
  • has a significant disability.

A child death benefit must be commuted by the time the child turns 25 unless the child is disabled.

Minimum pensions

If the deceased was in pension phase, the treatment of minimum pension payments varies depending on whether the pension was reversionary or non-reversionary.

If the deceased had a reversionary pension, then the minimum annual payment based on the deceased’s age must be paid during the year. At the next 1 July, the minimum payments will be recalculated based on the recipient’s age.

If the deceased had a non-reversionary pension, then there is no requirement to pay the minimum annual payment.

Rolling over

From 1 July 2017, a death benefit pension can be rolled over to another fund at any time. A death benefit pension always retains its identity as a death benefit. This is valuable because it means lump sum commutations from a death benefit pension are PAYG tax-free. However, death benefit pensions cannot be intermingled with other pensions and cannot be rolled back to accumulation phase.

The ability to rollover can be a valuable option in an SMSF where the surviving spouse may not wish to continue managing the SMSF on their own.

Taxation

All death benefit pensions are retirement phase pensions which means that the investment returns are not taxed.

The PAYG tax treatment of pension payments depends upon the age of the deceased and/or death benefit pension recipient and the tax components of the pension as outlined in the table below:

The taxable component – untaxed element will generally only arise from a constitutionally protected fund that is taxed differently to most funds.

Lump sum payments

Any lump sum commutations from death benefit pensions are PAYG tax free. Where both spouses are under 60, there may be advantages of taking the required minimum pension payment and using tax-free lump sum commutations to fund any additional lifestyle needs.

Case study

Brenda dies on her 50th birthday and has a benefit of $1,000,000 of which $10,000 is tax-free component.

If Brenda’s husband Barry who is also 50 were to take the death benefit as a pension and draw the minimum annual pension for 2020/21 of $20,000 (temporary minimum of 2%) his tax components would be as follows:

 

If this was Barry’s only income in 2020/21, he would not pay any tax on his pension income.

If, however, Barry needed $60,000 to live on he could take the additional $40,000 as a lump sum commutation PAYG tax free.

If he took the additional $40,000 as pension payments and this was his only income for 2020/21, he would pay tax (including Medicare levy) of approximately $1,941.

Assuming the death benefit pension was also $1,000,000 at 30 June 2021, if Barry was to draw the minimum annual pension for 2021/22 of $40,000 his tax components would be as follows:

 

Assuming no changes in personal tax rates, if this was Barry’s only income in 2021/22, he would pay the Medicare levy of $792.

If however Barry needed $60,000 to live on he could take the additional $20,000 as a lump sum commutation PAYG tax free.

If he took the additional $20,000 as pension payments and this was his only income for 2021/22, he would pay tax (including Medicare levy) of approximately $1,941.

Conclusion

Being aware of common misunderstandings in relation to the payment of death benefit pensions can assist in estate planning matters. Understanding the value of professional advice during difficult times can also greatly assist individuals to understand their choices and the tax consequences that follow.

 

Julie Steed is Senior Technical Services Manager at Australian Executor Trustees. This article is in the nature of general information and does not consider the circumstances of any individual.

 

RELATED ARTICLES

Meg on SMSFs: When the first member of a couple dies

Making death benefit nominations work for you

Court holds SMSF trustees accountable

banner

Most viewed in recent weeks

Maybe it’s time to consider taxing the family home

Australia could unlock smarter investment and greater equity by reforming housing tax concessions. Rethinking exemptions on the family home could benefit most Australians, especially renters and owners of modest homes.

Supercharging the ‘4% rule’ to ensure a richer retirement

The creator of the 4% rule for retirement withdrawals, Bill Bengen, has written a new book outlining fresh strategies to outlive your money, including holding fewer stocks in early retirement before increasing allocations.

Simple maths says the AI investment boom ends badly

This AI cycle feels less like a revolution and more like a rerun. Just like fibre in 2000, shale in 2014, and cannabis in 2019, the technology or product is real but the capital cycle will be brutal. Investors beware.

Why we should follow Canada and cut migration

An explosion in low-skilled migration to Australia has depressed wages, killed productivity, and cut rental vacancy rates to near decades-lows. It’s time both sides of politics addressed the issue.

Are franking credits worth pursuing?

Are franking credits factored into share prices? The data suggests they're probably not, and there are certain types of stocks that offer higher franking credits as well as the prospect for higher returns.

Are LICs licked?

LICs are continuing to struggle with large discounts and frustrated investors are wondering whether it’s worth holding onto them. This explains why the next 6-12 months will be make or break for many LICs.

Latest Updates

A nation of landlords and fund managers

Super and housing dwarf every other asset class in Australia, and they’ve both become too big to fail. Can they continue to grow at current rates, and if so, what are the implications for the economy, work and markets?

Economy

The hidden property empire of Australia’s politicians

With rising home prices and falling affordability, political leaders preach reform. But asset disclosures show many are heavily invested in property - raising doubts about whose interests housing policy really protects.

Retirement

Retiring debt-free may not be the best strategy

Retiring with debt may have advantages. Maintaining a mortgage on the family home can provide a line of credit in retirement for flexibility, extra income, and a DIY reverse mortgage strategy.

Shares

Why the ASX is losing Its best companies

The ASX is shrinking not by accident, but by design. A governance model that rewards detachment over ownership is driving capital into private hands and weakening public markets.

Investment strategies

3 reasons the party in big tech stocks may be over

The AI boom has sparked investor euphoria, but under the surface, US big tech is showing cracks - slowing growth, surging capex, and fading dominance signal it's time to question conventional tech optimism.

Investment strategies

Resilience is the new alpha

Trade is now a strategic weapon, reshaping the investment landscape. In this environment, resilient companies - those capable of absorbing shocks and defending margins - are best positioned to outperform.

Shares

The DNA of long-term compounding machines

The next generation of wealth creation is likely to emerge from founder influenced firms that combine scalable models with long-term alignment. Four signs can alert investors to these companies before the crowds.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.