Pensions, Tax

Pension can retain entitlements even when member dies

pension earnings entitlements

Non-reversionary income streams paid out through a pension can retain earnings entitlements and tax exemptions even when a member dies before payout.

A non-reversionary income stream paid out as an account-based pension (ABP) will retain its earnings entitlements and tax exemption even when a member dies before a pension payment has been made, according to an SMSF online service provider, which claims the issue has not been addressed by the SMSF sector.

SuperCentral made the claim in an article on its website that presented the case of a fund member who intended to take a minimum pension amount of $20,000, based on his attained age and commencement balance, for the 2020 financial year in May 2020, but instead died on 1 January 2020.

As a result of his passing, the minimum pension amount was not paid and could not be paid after his death, SuperCentral stated, leading to questions of whether the pension breached pension payment standards and if the member’s superannuation interest lost its entitlement to the earnings tax exemption.

“This issue has not been considered in the technical literature of SMSFs,” SuperCentral said,  providing its view that there was no loss of earnings entitlement.

Additionally, the earnings tax exemption would also continue until the member’s death benefit was cashed, either as a lump sum or applied to commence a death benefit pension, and if the cashing occurred within a reasonable time of the member’s death.

SuperCentral conceded that as the pension had ceased to satisfy the pension payments requirements, and nothing could be done to rectify this position, the pension had terminated, but for taxation purposes the entitlement to the earnings tax exemption continued.

“The entitlement to the earnings tax exemption continues because the superannuation interest was, immediately before [the member’s] death, supporting a superannuation income stream,” it said.

“Further, there was no breach of the pension payments standards immediately before [the member’s] death. Admittedly, in the circumstances of the example, there was a breach of the pension payment standards … but the entitlement to the continuation of the earnings tax exemption crystallised immediately before [the member’s] death.”

SuperCentral pointed out that if the member’s pension was reversionary instead and reverted to their beneficiary, then the minimum pension amount of $20,000 must be paid before 30 June 2020, but if there was a shortfall in the payment, ATO concessions may apply.

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