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We are always worried about what will happen to our Super after we die. Below, we provide one of the scenarios for members to consider for their estate planning.
Firstly, you must understand that a “Will” cannot control your Super; Super is controlled by its trust deed and the Superannuation Act and Regulations.
Upon a member’s death, a death benefit will be paid as a lump sum or a pension, even if the member has a Self-Managed Super Fund (SMSF), from the deceased member’s superannuation interest in the fund.
Here’s how it works:
When a Super member dies, their super money (including any insurance) becomes a death benefit and must be paid out quickly. (SIS Regulations 6.21(1): a member's benefits in a regulated superannuation fund must be cashed as soon as practicable after the member dies.)
This death benefit can be paid either:
- Lump Sum
A. As a single lump sum (one-off payment), or
B. As an interim lump sum and a final lump sum - One or more pensions, each of which is a super income stream that is in the retirement phase, also known as a death benefit pension (regular income payments)
Who can receive a death benefit Pension?
For (2) above to apply, the entitled recipient must request the trustee of the SMSF to be paid a pension. Also, at the time of the member's death, the entitled recipient:
- is a dependant of the member; and
- in the case of a child of the member:
A. is less than 18 years of age; or
B. being 18 or more years of age:
I. is financially dependent on the member and less than 25 years of age; or
II. is a person with a disability.
If a child is over 25 and working, they cannot be paid a pension.
In an SMSF scenario, the ability to pay a death benefit pension depends on whether the trust deed allows the dependant to choose to be paid a pension, despite the deceased member having executed a lump sum death benefit nomination, and whether the trustee has discretion to change the benefit from a lump sum to a retirement phase pension.
You must not confuse a death benefit pension with an account-based pension, which a member commences on retirement after reaching preservation age (60) and stopping work, or at age 65 or over while still working full-time.
Further Explanation
- Account-based pension: Commenced when a member retires. Regular income stream drawn from their own super.
- Death benefit pension: Commenced after the member’s death, on request from dependent(s), using the deceased member’s super balance.
There is a Limit On How Long a Child Can Receive a Pension
If benefits in relation to a deceased member are being paid to a child of the deceased member in the form of a pension, the benefits must be cashed as a Lump sum on the earlier of:
a. the day on which the pension is commuted or expires;
b. the day the child attains age 25;
unless the child has a disability.
Why Commencing a Death Benefit Pension is better vs Paying a Lump Sum
When a member passes away while still in accumulation phase — meaning they have not met a condition of release and not yet commenced a pension — the usual process is for the dependent is to receive the death benefit as a lump sum. This is usually tax-free.
However, if the dependent is below 60, any death benefit pension will generally add to their income, but they will receive a 15% rebate on the taxable portion.
If the dependent under 60 is not working and the pension is their only income, they can draw up to $61,450 tax-free in the 2025–26 financial year tax up to $61,450 is about 15%.
Hence, on the face of it, receiving a lump sum may appear better, as all the payments received (one or two lump sum payments) by the dependent are tax-free. But there are two key issues a dependent need to consider before deciding how to withdraw a death benefit:
1. If the recipient of the death benefit is over 60: Any death benefit pension received will be tax-free to the recipient.
2. If the fund must sell an asset to pay a lump sum: The fund will have to pay tax on any capital gain before a lump sum can be paid. This can be complicated — let’s explain with an example:
Assume Brett (age 63) and Mia (age 61) are working full-time and have an SMSF. On 1 July 2025, Brett’s balance is $1.5 million (60%) and Mia’s balance is $1 million (40%). The fund’s assets consist of a $2 million property and $500,000 in cash. The property was purchased about 12 years ago for $1 million.
On 1 October 2025, Brett dies in a road accident. Mia, as the remaining trustee, must pay out Brett’s benefit as soon as practicable.
Since there is not enough cash and, due to the compulsory cashing rules on death, Brett’s balance of $1.5 million must be paid out. The fund could sell the property and pay a lump sum to Mia.
The purchase price of the property was $1 million and it sells for $2 million, resulting in a $1 million capital gain. However, under tax laws (Section 115-100(b) of the ITAA), the fund receives a one-third discount, so instead of paying 15% tax on the full $1 million gain, it pays 10% tax, or $100,000 tax!
Can we save $100K tax?
Yes. Mia can choose to take Brett’s death benefit as a death benefit pension, and Brett’s 60% portion can be exempt from tax. She could also consider retiring and then commencing a pension before selling the property. In that case, she could withdraw $500,000 in cash from the fund, as no more than $2 million can be in pension phase.
By taking Brett’s death benefit ($1.5 million) as a pension, Mia will be able to:
- Transfer the deceased member’s benefits ($1.5 million) into her retirement (pension) phase through a Death Benefit Pension Agreement.
- Withdraw any amount as a pension (there is no maximum pension withdrawal limit — Mia can withdraw up to 100% of the pension balance as a pension payment).
If the property is sold after the pension has commenced, any earnings and capital gains on the sale of the fund’s assets (including the property) become exempt from tax, allowing the fund to save $100,000 in tax.
How can we help you?
We can assist you with estate planning strategies you may need to put in place for your SMSF. Please do not hesitate to contact our office to take the next step.
