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Be aware of rolling over death benefit pensions to SMSFs

I had an interesting question raised via a financial adviser last week regarding a death benefit pension being paid to a member under age 55 who wished to transfer this to a SMSF.  I thought I would share with you the important implications of this decision.

John (52) passed away and is survived by Jane (48).  His super benefit resides in a retail super fund, with the proceeds of the life insurance to be paid to John’s account and applied as part of a death benefit pension for Jane.  There has now been a suggestion to transfer Jane’s death benefit pension to a SMSF.  What are the  consequences (if any) of Jane transferring the benefit?

In the event of the death of a member, where a tax dependant exists, such as a spouse, the beneficiary has the right to receive the benefit in the form of a lump sum, pension or combination of both (subject to the governing rules of the fund).  Depending on the age of the deceased member, there are different tax consequences where the benefit is taken as an income stream.  The table below outlines this:

Age Taxable Component  (taxed element) Taxable Component (untaxed element)
60 and above 0% – Non-Assessable, Non-Exempt (NANE) Income MTR less a 10% tax offset
Preservation age* to 59 MTR less a 15% tax offset MTR (no tax offset)
Below preservation age* MTR (no tax offset) MTR (no tax offset)

However, where the amount is commuted and rolled over to another complying superannuation fund (including SMSF), the character of the superannuation interest (being a death benefit pension) ceases.  The benefits are still unrestricted for the member or beneficiary, however any income stream taken will simply apply against the account based pension rules and be ineligible for the 15% tax offset.It is important to note that the 15% tax offset also applies under preservation age* to a member where a disability super benefit is paid or to a beneficiary of a deceased member receiving a death benefit pension.

It is therefore important that you understand the potential impact of switching benefits as it could have a significant tax impact.

Learn more about this and other pension issues and strategies in the SMSF Pensions Webinar on Tuesday, 29 November

* Preservation age 

Date of birth

Preservation age

Before 1 July 1960

55

1 July 1960 – 30 June 1961

56

1 July 1961 – 30 June 1962

57

1 July 1962 – 30 June 1963

58

1 July 1963 – 30 June 1964

59

From 1 July 1964

60

Comments

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One thought on “Be aware of rolling over death benefit pensions to SMSFs

  1. Table item 1 in s307-5 of the ITAA97 states that a superannuation death benefit is “a payment to you from a superannuation fund, after another person’s death, because the other person was a fund member”.

    The wording here is not fund specific, “from a superannuation fund” can mean any fund. “was a fund member” again can mean any fund.

    Consider this, most public offer funds in accumulation are not capable of purchasing an annuity or setting up a pension, they themselves roll into another fund to do this. Your arguing a case where the rebate is not allowable to either pension fund.

    Regulation 6.21(2) says the death benefit can cashed via “1 or more pensions or the purchase of 1 or more annuities”

    6.21(3) Allows for the benefits to be rolled over for immediate cashing.

    There is enough flexibility in the wording of the regulations to again consider that it isnt relevant which fund the money is involved as long as the death benefit is cashed via a pension.

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