Senior SMSF Technical Specialist
There are not only special rules about who can receive a death benefit pension but there are also special rules around taking lump sums (partial commutation) or stopping these types of pensions altogether (full commutation). Here are our top 5 tips.
Now we have already covered a number of tips for fully commuting pensions in our blog here as well as partially commuting pensions here. However, since death benefit pensions have some special rules, they need their own set of tips to follow in addition to the tips in our earlier blogs!
Tip 1 is to remember you can’t partially or fully commute a death benefit pension and keep the benefits in the member’s accumulation account. This will breach the cashing rules. Instead, the benefit must be paid as a lump sum benefit to the member or rolled over to another complying super fund and a new death benefit pension commenced.
This ties into Tip 2 which is, if you are processing a rollover (as a result of a partial or full commutation of a death benefit), make sure the data sent via Super Stream correctly flags the member is rolling a death benefit. This ensures the trustee of the receiving fund will know to keep these benefits separate from any other interests of the member and also to commence a new death benefit pension. The requirement to give information to members can be satisfied by giving them a paper copy of the Death benefit rollover statement (NAT # 74924).
Tip 3 is there is no limitation on the number of permitted commutations made from a death benefit pension. Whilst trustees are, when paying death benefits as a lump sum, restricted to paying a maximum of two payments per beneficiary per account, this rule does not extend to death benefit pensions. However, be sure to check the terms and conditions of the pension to ensure a commutation is otherwise allowed. For example, whilst it may be possible to commute a death benefit pension which is an account based pension, restrictions may apply to other types of pensions, such as market linked or life expectancy pensions.
Do remember the trustee may be required to commute the death benefit pension if the pension is being paid to a child of the deceased member. Unless the child suffers from a severe disability, the trustee must fully commute the death benefit pension and pay a lump sum to the child by the time they reach age 25. Be sure to have a way to track this so this milestone is not overlooked (tip 4). Benefits cashed in accordance with these rules will be tax free to the child.
Death benefit pensions attract exempt current pension income whilst the pension continues. As such it’s important to ensure pension standards are met (including taking the minimum pension etc), as well as ensuring a death benefit pension isn’t stopped too early (tip 5). For example, if a member wants to withdraw their benefits from the fund and fund investments are to be sold down or the member is going to take an in-specie benefit (receive an asset other than cash), taking a partial commutation first and then taking a residual pension payment will help to ensure the pension is still in place if any capital gains are triggered. This will be important if the fund is using the segregated method when calculating the fund’s exempt current pension income.
Making sure death benefit pensions are commuted correctly will not only ensure the cashing rules are met but any associated tax savings enjoyed.
Death benefits are covered in full in the Heffron Super Companion – an online resource that's regularly updated and will always reflect the latest rules, changes to legislation, case law or regulator views. You can be confident that the information is up to date and accurate. Learn more and subscribe here.