Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 212

Easier transfer of death benefit pensions

In my previous article, I discussed how a surviving spouse can receive a death benefit pension and how the new Transfer Balance Cap operates. This second article focusses on other features of death benefit pensions.

How is a death benefit pension taxed?

If the deceased or death benefit pension recipient was aged 60 and over, the recipient, for example a surviving spouse, receives the pension tax-free. If the deceased and the death benefit pension recipient were both under age 60, the pension is taxed as follows:

  • Tax-free component of pension - 0% tax.
  • Taxable component of pension – taxed at personal tax rates plus applicable levies such as Medicare less a 15% tax offset.

The 15% tax offset only applies while the pension is classified as a death benefit pension.

Can you transfer a death benefit pension to another fund?

To transfer any pension from one fund to another, you must stop or fully commute the pension back to accumulation phase, rollover the accumulation monies and commence a new pension in the new superannuation fund.

It is not uncommon for a surviving spouse to move their death benefit pension to another superannuation provider. The death benefit pension may be commenced or the pension may revert on death from an SMSF. If the surviving spouse does not wish to continue with the SMSF, they may transfer the pension to another non-SMSF provider. Under the previous rules, the surviving spouse had to wait until the expiration of the ‘death benefit period’ before affecting the transfer to the new superannuation fund, to avoid the nasty tax outcome.

However, even after waiting for the ‘death benefit period’ to pass, once the death benefit pension was transferred to the new fund and a new pension commenced, the new pension will have lost any link to being a death benefit pension. Consequently, if the surviving spouse was under age 60, the taxable component of the pension was assessable, but with no 15% tax offset.

How has the 1 July law change helped?

Prior to the new law starting on 1 July 2017, if a surviving spouse under age 60 elected to receive a lump sum death benefit payment, rather than a pension, they needed to fully commute the death benefit pension to a lump sum within the ‘death benefit period’, otherwise tax may have been levied.

From 1 July 2017, it is possible to roll over death benefit entitlements to other funds without having to wait for the expiration of the ‘death benefit period’. Once the amount has been rolled over it will continue to be recognised as a death benefit superannuation interest and must be used to commence an income stream from the recipient fund or cashed out as a lump sum. This allows a beneficiary to rollover a death benefit pension to a fund of their choice, including a SMSF. It retains the concessional tax treatment associated with a superannuation income stream death benefit (i.e. tax offset equal to 15% of the taxable component for those under age 60).

In effect, the ‘death benefit period’ was abolished from 1 July 2017. No longer will this period need to be taken into consideration when deciding on whether to fully commute a death benefit pension or transfer it to another superannuation fund. In essence, once a death benefit pension, always a death benefit pension. Further, the only way you can cease a death benefit pension is to commute it, either partially or fully and remove it entirely from the superannuation system as a lump sum benefit payment. That is, from 1 July 2017, you cannot commute a death benefit pension back to the accumulation account of the surviving spouse. However, as it will retain its character as a death benefit pension when commuted by a surviving spouse, the lump sum will be received 100% tax-free, no matter how long after the original member’s death or the age of the surviving spouse.

 

Mark Ellem is Executive Manager, SMSF Technical Services at SuperConcepts, a leading provider of innovative SMSF services, training and administration. This article is for general information only and does not consider the circumstances of any individual.


 

Leave a Comment:

     

RELATED ARTICLES

When death benefits include life insurance

Limits to a will’s power over an SMSF

Super timing guide for contributions and reversionary pensions

banner

Most viewed in recent weeks

10 reasons wealthy homeowners shouldn't receive welfare

The RBA Governor says rising house prices are due to "the design of our taxation and social security systems". The OECD says "the prolonged boom in house prices has inflated the wealth of many pensioners without impacting their pension eligibility." What's your view?

Three all-time best tables for every adviser and investor

It's a remarkable statistic. In any year since 1875, if you had invested in the Australian stock index, turned away and come back eight years later, your average return would be 120% with no negative periods.

The looming excess of housing and why prices will fall

Never stand between Australian households and an uncapped government programme with $3 billion in ‘free money’ to build or renovate their homes. But excess supply is coming with an absence of net migration.

Five stocks that have worked well in our portfolios

Picking macro trends is difficult. What may seem logical and compelling one minute may completely change a few months later. There are better rewards from focussing on identifying the best companies at good prices.

Survey responses on pension eligibility for wealthy homeowners

The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?

Let's make this clear again ... franking credits are fair

Critics of franking credits are missing the main point. The taxable income of shareholders/taxpayers must also include the company tax previously paid to the ATO before the dividend was distributed. It is fair.

Latest Updates

Investment strategies

Joe Hockey on the big investment influences on Australia

Former Treasurer Joe Hockey became Australia's Ambassador to the US and he now runs an office in Washington, giving him a unique perspective on geopolitical issues. They have never been so important for investors.

Investment strategies

The tipping point for investing in decarbonisation

Throughout time, transformative technology has changed the course of human history, but it is easy to be lulled into believing new technology will also transform investment returns. Where's the tipping point?

Exchange traded products

The options to gain equity exposure with less risk

Equity investing pays off over long terms but comes with risks in the short term that many people cannot tolerate, especially retirees preserving capital. There are ways to invest in stocks with little downside.

Exchange traded products

8 ways LIC bonus options can benefit investors

Bonus options issued by Listed Investment Companies (LICs) deliver many advantages but there is a potential dilutionary impact if options are exercised well below the share price. This must be factored in.

Retirement

Survey responses on pension eligibility for wealthy homeowners

The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?

Investment strategies

Three demographic themes shaping investments for the future

Focussing on companies that will benefit from slow moving, long duration and highly predictable demographic trends can help investors predict future opportunities. Three main themes stand out.

Fixed interest

It's not high return/risk equities versus low return/risk bonds

High-yield bonds carry more risk than investment grade but they offer higher income returns. An allocation to high-yield bonds in a portfolio - alongside equities and other bonds – is worth considering.

Sponsors

Alliances

© 2021 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. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). 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.

Website Development by Master Publisher.