Super strategies after losing your spouse in retirement: What are the rules?

Let’s look at one example

Angela started an account-based pension in 2020 with a balance of $1 million. Her partner Greg died on 10 March 2025, leaving her a reversionary pension worth $900,000.

Angela’s personal transfer balance cap is currently $1,768,000. She is not entitled to the general cap of $2 million because people who already have a transfer balance account receive a proportion of the cap’s indexation that corresponds to the amount of the cap they have not already used.

When Greg’s pension balance is added on 10 March 2026, the total balance of Angela’s transfer balance account will be $1.9 million. This is $132,000 above her transfer balance cap on that date.

Thanks to the 12-month grace period, Angela has time to take action before she inadvertently exceeds the cap.

Option 1

Transfer some or all your pension account balance back into a super accumulation account, creating enough cap space to keep the reversionary pension you inherited from your spouse (or to commence a death benefit pension with it, if it was in accumulation phase). Alternatively, if transferring your whole pension to accumulation phase doesn’t create sufficient space to accomodate your partner’s entire pension value, it may be necessary to both transfer your pension to accumulation and take a partial lump sum from your partner’s account to remain under your cap.

Future investment earnings on the amount invested in your accumulation account will be taxed at up to 15%. The advantages of this strategy are that it allows you to maximise the amount you have in your tax-free super pensions and avoids the need to withdraw a lump sum from your partner’s pension, which may require you to sell assets supporting that account.

The one proviso is that your existing super pension must be ‘commutable’. A commutable pension is one that can be withdrawn or rolled over out of your pension account. Most account-based pensions are commutable, but if you have a defined benefit pension or have purchased a lifetime pension it may not be allowed, so you will need to check with your fund.

Using the example of Angela above, if her existing pension is commutable, she can transfer (roll over) $132,000 from her pension into a super accumulation account, leaving her with a transfer balance account balance of $868,000. She then has space for the full amount of Greg’s $900,000 death benefits.

If Angela’s existing pension is non-commutable, this option isn’t available.

Option 2

Retain part of your partner’s death benefits as a pension and pay out any excess above the cap as a lump sum.

If your existing pension is non-commutable, this option allows you to maximise the amount you can keep in the super system by removing only the excess value. Death benefits can’t be retained in super unless they form part of a Death Benefit Pension, so any excess will have to be paid to you as a lump sum outside super.

For example, if Angela’s $1 million pension is non-commutable, she can withdraw $132,000 from the reversionary pension she has inherited from Greg as a lump sum. This will create a debit in her transfer balance account that makes space for the $900,000 credit that will occur.

So long as Angela withdraws the lump sum within 12 months of Greg’s death, she will not exceed her cap.

If Angela and Greg have an SMSF, assets supporting Greg’s death benefits may need to be sold to finance this payment if an in-specie transfer is not possible.

Option 3

Withdraw all your partner’s death benefits out of super as a lump sum.

If you would prefer to receive the full amount as a lump sum rather than use it as a pension, then you simply need to be aware of the tax consequences for future earnings once the amount is reinvested outside the super system. Choose carefully because you may not be eligible to put the money back in super if you change your mind.