Dual pension strategy: Reducing super death benefits tax for non-dependants

There is another strategy that goes one step further in saving tax on super death benefits – the dual pension strategy.

What is the dual pension strategy?

This strategy minimises future tax on lump sum death benefits when a person has a mix of tax-dependent and non-tax-dependent beneficiaries, or non-tax-dependent beneficiaries only, on their super death benefit nomination.

It starts with a recontribution strategy, but with a twist: the contribution goes into a separate super account and not the one it was withdrawn from. This preserves the existing tax-free proportion in the original interest, while the new interest created from the contribution is 100% tax free.

The result is two super accounts – one with a combination of taxable and tax-free components and another one that has a 100% tax-free component.

Free eBook

Retirement planning for beginners

Our easy-to-follow guide walks you through the fundamentals, giving you the confidence to start your own retirement plans.

"*" indicates required fields

Phone

This field is for validation purposes and should be left unchanged.

First name*

First

Email address*

Then, account-based pensions are commenced from the two super accounts. The dependent beneficiary is named as the recipient of the pension that contains a significant taxable component, while the non-dependent beneficiary is designated to receive the pension that was commenced from the account containing 100% tax-free component.

In the event of the member’s death, this approach ensures that the non-dependent beneficiary receives the tax-free component (the only component generally not subject to tax where a lump sum death benefit is paid), while the dependent beneficiary receives the other account that has a combination of taxable and tax-free component, which is tax free for dependant beneficiaries.

An example will help illustrate the strategy.

Current

If Jane passed away today, her husband would receive $250,000 tax free as a dependant but her adult son would likely pay 15% tax plus 2% Medicare levy on his $250,000 benefit, or $42,500.

Using a standard recontribution strategy with half of her balance (withdrawing $250,000 and reinvesting it in the same account as a non-concessional contribution), below will be her tax components:

Standard recontribution strategy

In this case, if Jane passed away today, her adult son would receive $250,000, made up of $125,000 taxable component and $125,000 tax-free component, as the tax components of partial payments maintain the same ratio of taxable to tax-free that exists within the account as a whole.

Her son would likely pay 15% tax plus 2% Medicare Levy on the $125,000 taxable proportion – $21,250.

With a dual pension strategy with half her balance, below will be her tax components:

2026 SMSF calendar

Our free calendar includes due dates for important documents plus suggested dates for trustee meetings and other strategic issues for your SMSF.

"*" indicates required fields

X/Twitter

This field is for validation purposes and should be left unchanged.

First name*

First

Email address*

Pension 1

Her husband would receive $250,000 tax free as a dependant.

Pension 2

Her adult son would also receive $250,000 tax free as Pension 2 has a 100% tax-free component. The pension will remain 100% tax-free component for as long as it has a balance because the ratio of tax components is frozen when a pension commences.

We can see that Jane’s adult son has received his share of the inheritance tax free, potentially saving tax of up to $42,500, through the use of a dual pension strategy.

Dual pension strategy with only non-tax-dependent beneficiaries

When someone aged 60 or over has only non-dependent beneficiaries, a dual pension strategy can still be effective. When two account-based pensions are established using this strategy, the member can preserve the 100% tax-free component by only drawing down the minimum required pension from it and drawing the minimum plus any extra income required from the other pension account.

In the event of death, this strategy ensures the taxable component has been minimised and the tax-free component has been preserved, maximising the net death benefit for the non-tax-dependent beneficiaries.