Return to full SMSF article list
HomeFree weekly newsletterFree newsletter archiveContact usLogin

Self Managed Super Fund (SMSF) Article
Types of SMSF Death Benefits

By Tony Negline.

This article may be out of date.

3rd August 2004

Click here to buy - A How To Book of SMSF's by Tony Negline

In 1789 Benjamin Franklin famously wrote, “in this world nothing can be said to be certain, except death and taxes.”

The fact is that nothing could be more true for super funds even though when Franklin wrote this statement he was not talking about the fledging United States Constitution.

When a member of a super fund dies, the net of tax benefit received by the beneficiaries is highly variable.  The amount of tax payable for super fund death benefits is determined by how a death benefit is paid and to whom it is paid.

Death benefits can either be paid as lump sums or as pensions.

A careful examination of a Self Managed Super Fund’s trust deed is essential to understand how a SMSF would deal with a deceased member’s benefits because the wording used varies greatly from trust deed provider to trust deed provider.

Trustees and members of SMSFs must make sure that the type of death benefit they want paid is permitted by their fund’s trust deed.  For example a fund may want to pay a surviving spouse a pension.  This is only possible if the trust deed allows it.

We has seen trust deeds which allow death benefit pensions only to be paid to the spouse and that pension can only be an allocated pension.

On the face of it this seems reasonably okay.  For some SMSFs it will be exactly what they are looking for.

However for other SMSFs this provision is unnecessarily, and even adversely, restrictive.  A provision like this stops a trustee from paying a surviving spouse a pension structure which may be more suitable for that spouse’s circumstances.

For example a trustee might want to pay a non-commutable lifetime pension.  This may be deemed more suitable for no other reason than the trustee wants to eliminate longevity risk – that is, the threat of the surviving spouse still being alive when the super fund runs out of money.

It might also be needed because the surviving spouse may be a spend thrift and needs to be ‘protected’ from themselves.  (Most allocated pensions allow the pensions to convert the income stream into a lump sum – called a commutation - at anytime.)  There might also be a concern about a surviving spouse remarrying a ‘gold digger’.

But what different pension structures can your SMSF deed allow?  Since this year’s Federal Budget, the government has been moving against term and lifetime pensions within SMSFs (although a complete ban has not been finally put in place, their future is doubtful) so these types of pensions may no longer be used to pay new death benefits.

Only allowing an allocated pension to be paid to the surviving spouse and to no one else might also stop a trustee from paying a child under 18 a death benefit pension.  Such pensions can be particularly powerful from a tax planning point of view.  The capital value of such pensions may not be counted towards the deceased’s Reasonable Benefit Limit and each income payment may be entitled to a 15% rebate.

These combined tax concessions represent one of the biggest tax benefits available in the Australian income tax laws.  It is amazing that so few people seem to know about them or even plan to use them.

With pensions paid to minors there are many issues for a trustee to consider.  Firstly what type of pension?  Some people think a term pension is best – perhaps payable until the child turns a pre-specified age.  The most popular ages are 18, 21 and 25.

However as new term pensions in SMSFs are probably no longer going to be allowed, some other structure has to be found.  To the best of our knowledge no one has thought of a suitable replacement product since the government knocked term pensions over.

The new Market Linked Income Streams (which many existing SMSF trust deeds would not be allowed to pay anyway because they are not detailed in the trust deed) are technically term pensions but that term must be for a minimum of the pensioners remaining life expectancy when the pension is first paid.  A pension paid to a 10 year old child would have a minimum term of about 70 years and a very low income to match this very long term.  These new pension structures cannot be converted into a lump sum.

Allocated pensions for children are also going to be paid for a very long time and the issue of being able to convert this product into a lump sum at any time is an issue that needs careful consideration.

Hopefully the government realises that by disallowing all of these types of pensions it has stopped legitimate arrangements from being implemented.

Return to full article list of SMSF articles


Share this article
Click to share this article on Facebook Click to share this article on Twitter

If you would like more SMSF articles like this by email, subscribe! It's free.

[Bold fields are required]

Your details

Your alternate email address is used only if messages to your primary email address are returned to us.


Do you work in the financial services industry?

This email is general in nature only and does not constitute or convey specific or professional advice. Legislation changes may occur quickly. Formal advice should be sought before acting in any of the areas discussed. Be aware that the information in these articles may become innaccurate with time. Responsibility is disclaimed for any inaccuracies, errors or omissions. Particular investments are neither invited nor recommended and hence this publication is not "financial product advice" as defined in Section 766B of the above legislation. All expressions of opinion by contributors are published on the basis that they are not to be regarded as expressing the official opinion of any other person or entity unless expressly stated. No responsibility for the accuracy of the opinions or information contained in the contributor's articles is accepted by any other person or entity. Copyright: This publication is copyright. If you wish to reproduce this article you require a license, which can be purchased here, to do so.

Site design by Raycon