Where a client receiving an account based pension passes away part way through a financial year, and their death benefit is paid as an account based pension to an eligible beneficiary, the minimum payment requirement that applies for that financial year depends on whether their pension automatically reverted on death.
Minimum payment requirement – no automatic reversion
Where an account based pension does not automatically revert upon death but a new death benefit pension is paid to an eligible beneficiary, a new account based pension commences at that time. In the first part-financial year of the new death benefit account based pension, at least a pro rata minimum payment must be made based on:
- the starting balance,
- the age of the new recipient at commencement, and
- the number of days remaining in the financial year.1
In this situation, the deceased will have also been in receipt of an account based pension for part of a financial year. While a pro rata minimum payment2 is normally required prior to the full commutation of an account based pension, an exception3 applies to require no pro rata minimum to be taken where the commutation occurs as a result of the pensioner’s death.
In addition, no minimum payment requirement applies in respect of the time between the date of death and when the new account based pension commences.
Example
Jasmine (age 65) has an account based pension (no automatic reversion) with a balance of $500,000 at 1 July 2018. Her minimum payment for the 2018-19 financial year is $25,000 ($500,000 x 5%). Jasmine decides to wait until later in the financial year to take her payment, but passes away on 21 November 2018 before a payment is taken.
After some delay, on 1 March 2019 her fund commences to pay a new death benefit account based pension with a starting balance of $520,000 to her spouse Luke (age 64).
In this situation, no minimum payment is required during the first part of the financial year while Jasmine was receiving the pension as it has been commuted due to her death. No minimum payment requirement is required between the date of her death and 28 February 2019 (as no pension is running).
However, Luke would be required to take a pro rata minimum payment of $6,950 ($520,000 x 4% x 122 days / 365 days, rounded to the nearest $10) during the remainder of the 2018-19 financial year.
Minimum payment requirement – automatic reversion
Where an account based pension automatically reverts upon death during a financial year, it is not commuted and the existing pension continues with future payments being made to the reversionary beneficiary rather than the (now deceased) primary beneficiary.
This means that during the financial year the primary beneficiary dies, the full minimum drawdown (calculated at 1 July of the financial year) continues to apply until the end of that financial year. The balance of the pension, and the reversionary beneficiary’s age, is irrelevant in determining the amount they must draw during the financial year the primary beneficiary dies. The full minimum drawdown will be met from the total of pension payments to the deceased beneficiary (if any) and pension payments to the reversionary beneficiary.
No pro rata minimum payment provisions arise in this situation; assuming the reversionary beneficiary does not commute the pension during the remainder of the financial year.
Example
Lachlan (age 65) has an account based pension (automatic reversion) with a balance of $500,000 at 1 July 2018. His minimum payment for the 2018-19 financial year is $25,000 ($500,000 x 5%). Lachlan decides to wait until later in the financial year to take his payment, but passes away on 21 November 2018 before a payment is taken.
The account based pension (valued at $520,000 at the time of death) immediately reverts to his spouse Kate (age 64) and continues to be paid as a death benefit account based pension.
In this situation, the pension existed at 1 July 2018 when the minimum payment was determined to be $25,000, and has not been commuted since that time. Kate is therefore required to ensure that the full minimum payment is taken throughout the 2018-19 financial year. As Lachlan has not received any pension payments, Kate must draw $25,000 by the end of the 2018-19 financial year.
In contrast, if we instead assume that Lachlan had already drawn the full minimum pension payment of $25,000 prior to his death, Kate would not be required to draw any pension payments during the remainder of the financial year.
Endnotes
1. Superannuation Industry (Supervision) Regulations 1994 (Cth), reg 1.06(9A)(a) and Schedule 7.
2. Superannuation Industry (Supervision) Regulations 1994 (Cth), regs 1.06(1)(b), 1.07D(1)(d) and 1.07D(2)
3. Superannuation Industry (Supervision) Regulations 1994 (Cth), reg 1.07D(1)(a).
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Disclaimer
The information contained in this update is based on the understanding Avanteos Investments Limited ABN 20 096 259 979, AFSL 245531 (AIL) and Colonial First State Investments Limited ABN 98 002 348 352, AFSL 232468 (CFSIL) has of the relevant Australian laws as at the article date. As these laws are subject to change you should refer to our website at www.cfs.com.au or talk to a professional adviser for the most up-to-date information. The information is for adviser use only and is not a substitute for investors seeking advice. While all care has been taken in the preparation of this document (using sources believed to be reliable and accurate), no person, including AIL, nor CFSIL, accepts responsibility for any loss suffered by any person arising from reliance on this information. This update is not financial product advice and does not take into account any individual’s objectives, financial situation or needs. Any examples are for illustrative purposes only and actual risks and benefits will vary depending on each investor’s individual circumstances. You should form your own opinion and take your own legal, taxation and financial advice on the application of the information to your business and your clients.
Taxation considerations are general and based on present taxation laws and may be subject to change. You should seek independent, professional tax advice before making any decision based on this information.
AIL and CFSIL are also not a registered tax (financial) adviser under the Tax Agent Services Act 2009 and you should seek tax advice from a registered tax agent or a registered tax (financial) adviser if you intend to rely on this information to satisfy the liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law.