What happens when a pensioner dies? ❤️
When anyone dies, someone else will receive their super.
There are rules about who that can be (for example, for most people it will only be their spouse, children or their estate). The group that can receive that super as a pension is even smaller. In fact, it’s generally just the spouse and dependent children under 25. Super paid to the deceased’s estate or adult children must generally be paid as a lump sum. So for the purposes of this article, we’ll just refer to the spouse when it comes to the deceased’s super being paid as a pension.
And there are some important quirks to consider if the deceased had already converted the super to a pension.
When a pension is first set up, a key decision is made – will it be “reversionary” (continue automatically to the spouse when the original pensioner dies) or “non reversionary”.
A key difference between the two is that if the pension is reversionary, the pension just keeps running when the original pensioner dies – it simply has a change in ownership. In contrast, if the pension is not reversionary, it stops when the original pensioner dies. This has some important ramifications.
Pension payments for the year
It’s particularly important when it comes to what has to be paid from the pension during the year.
Let’s imagine Gary (currently 70) is receiving a pension from the CJ Superannuation Fund and dies on 1 May 2022. When he first set up his pension, he nominated his wife Ruth as his reversionary beneficiary. By the time he died, Gary hadn’t taken any pension payments (which is perfectly legal and in fact common in SMSFs). As the pension is reversionary, the trustee needs to ensure that the full year’s minimum is paid before 30 June 2022. It will all be paid to Ruth, not to Gary’s estate or split between them in some way to reflect the fact that she only “owned” the pension for the last 2 months of the year.
And the amount will be the whole minimum pension amount worked out at the start of the year – ie 2.5% (allowing for the temporary halving of minimum pension payments in 2021/22) of Gary’s pension balance at 1 July 2021. Note that we don’t need to know Ruth’s age to work this out – while the minimum will end up being paid to Ruth, it was worked out at the start of the year based on who owned the pension at the time (Gary). The minimum payment for 2022/23 will be worked out using Ruth’s age at 1 July 2022.
In contrast, if the pension wasn’t reversionary, it is considered to have stopped as soon as Gary died. There is no need for Ruth to take any payments from it in 2021/22. In fact the reverse is true – unless the trustee has very quickly decided to pay Gary’s super to Ruth as a pension, she can’t receive any pension payments from his balance. This can be tricky if, say, Ruth doesn’t have her own pension but there is a regular payment from the SMSF’s bank account to their personal bank account. The trustee should stop those payments until a decision has actually been made to pay the super as a pension to Ruth. (Of course all these decisions can be made very quickly in an SMSF.)
Transfer balance account reports (TBARs)
One of the special rules for TBARs is that if Gary’s pension is reversionary, the value won’t be added to Ruth’s transfer balance account until May 2023 (12 months after Gary’s death). But the trustee still has to lodge the relevant TBAR more or less immediately (for example, if the fund is required to lodge TBARs quarterly, this one would need to be lodged by 28 July 2022). The amount on that TBAR is also the value of Gary’s pension account at 1 May 2022 rather than 12 months later.
Sometimes people in Ruth’s position might take a commutation from their inherited pension. A common mistake is to assume that the commutation should be reported in Gary’s name (it’s a commutation from super that was his after all). In fact, it’s reported in Ruth’s name – because she “owns” the pension at the time it’s commuted. This is true even if Ruth takes a commutation before reaching the 12 month anniversary of Gary’s death.
In contrast, if the pension was non reversionary the trustee might not have to lodge a TBAR at all – these are only for pensions so it will depend on whether any of Gary’s super is paid to Ruth as a pension. If it is, a TBAR will be required just as it would for any other new pension. The amount will be whatever is put into a pension for Ruth (which might be all or just some of Gary’s pension balance). If Gary’s balance has grown in the meantime, a higher amount may well be reflected in Ruth’s transfer balance account than would have been the case if the pension had been reversionary. Of course the reverse is true if Gary’s pension account has fallen in value.
Exempt current pension income (ECPI)
One area where there is no difference between reversionary and non reversionary pensions is the tax treatment of investment income in the fund.
It makes sense that Gary’s pension account should continue to be counted as a “pension account” (and increase the fund’s ECPI) if it has automatically continued to Ruth. After all, it’s still a pension.
But in fact this key tax exemption even continues if the pension is not reversionary. It continues until the account is either converted to a new pension or paid out to his estate or another beneficiary.
This article was first published by Meg Heffron of Heffron Consulting.
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