The death of a spouse is an emotional time in one’s life, but it’s also a time when many pressing financial decisions need to be made.
For retirees, the surviving spouse is often left with a decision about what to do with their deceased partner’s superannuation death benefit.
There are various options to explore, depending on your circumstances. If your partner left you a reversionary death benefit income stream, should you leave their death benefit in retirement phase alongside your own super pension, thereby maintaining multiple pension accounts? Or should you receive a lump sum death benefit? Or can you combine your pension and your partner’s death benefits for administrative simplicity?
There is a limit on the total amount you can transfer into retirement phase, called the transfer balance cap. In addition, your total super balance may restrict further contributions into an accumulation account. In 2024–25, the general transfer balance cap is $1.9 million, but your personal cap is lower if you started a super pension before 1 July 2023 when the cap was last indexed.
Here we will explore the third option and assume the surviving partner is eligible to take advantage of a recontribution strategy to hold the death benefits either in an accumulation account or in a single pension combined with their own benefits. If they are under 75, they can take advantage of non-concessional contributions and the bring-forward rules to implement this strategy.
Jerry passed away at age 74 leaving a super death benefit of $400,000
His wife Judy is 72 and the reversionary beneficiary of Jerry’s pension account
Judy’s own pension account balance is $250,000.
Judy does not want the complexity of managing two pension accounts, nor does she want to receive the $400,000 as a lump sum.
As she is under 75 years old, Judy can:
Open a new super accumulation account
Withdraw Jerry’s death benefit of $400,000 and pay it into her bank account
Recontribute $120,000 in the 2024–25 financial year into her new super account
Trigger the bring-forward rule in the 2025–26 financial year and contribute the remaining $280,000 into her super account
Consolidate her own pension account with the new super account to form a brand-new single pension account, after the above contributions are made. This process involves commuting Judy’s pension account into the new accumulation account. A new super pension can then be opened with the combined amounts.
Judy now has only one pension account, which provides her with simplicity, ease of administration and possible savings on multiple super administration fees.
Good to know
A recontribution strategy also converts the benefit to a tax-free component that will be tax free if adult children inherit it later. This presents important estate planning opportunities. It should be noted that a recontribution strategy cannot be used once you turn 75, as no further non-concessional contributions are permitted beyond that age.
If you have an SMSF, ensure the pension annual minimum drawdowns have been met before pensions are commuted. In a large super fund, the administrator will take care of this for you.
Ensure this strategy meets your estate planning needs.
If your total super balance on the most recent 30 June was higher than the current financial year’s transfer balance cap, you cannot make non-concessional contributions.
Your ability to use the bring-forward rule in 2024–25 is restricted if your total super balance on 30 June 2023 was $1.66 million or more.
If the total value of the death benefit is greater than contribution caps will allow you to add to super before you turn 75, it will not be possible to create a single pension.
Upgrade your retirement with a SuperGuide membership
Unlock independent expert guidance to make your super last and boost your income in retirement.
Interactive tools and calculators give you power to plan
Step-by-step guides help you put plans into action
Discover best performing super and pension funds
Experts detail tips and strategies to boost your nest egg
Comprehensive super rules in plain language
Newsletters and webinars keep you on top of the current rules
Aakash Mehta is a financial adviser and has been working in the financial planning profession for more than 7 years. He has an undergraduate degree in commerce, a post-graduate degree in international finance and a diploma in financial planning. His day-to-day work exposes him to real life financial planning issues around superannuation, retirement, insurance and estate planning, and he contributes to SuperGuide by writing case studies and articles on various financial planning strategies.
IMPORTANT: All information on SuperGuide is general in nature only and does not take into account your personal objectives, financial situation or needs. You should consider whether any information on SuperGuide is appropriate to you before acting on it. If SuperGuide refers to a financial product you should obtain the relevant product disclosure statement (PDS) or seek personal financial advice before making any investment decisions. Comments provided by readers that may include information relating to tax, superannuation or other rules cannot be relied upon as advice. SuperGuide does not verify the information provided within comments from readers. Learn more
Leave a Reply
You must be logged in to post a comment.