Important steps highlighted with lump sum payments, death benefit pensions
SMSF professionals have been reminded of some of the crucial steps involved when assisting clients that want to draw lump sum payments from a death benefit pension.
In an online article, Heffron senior SMSF technical specialist Annie Dawson explained that since 1 July 2017, the ability to stop a death benefit pension and “roll back” the proceeds to accumulation had been removed.
“Since that time, this type of pension has also had to be quarantined – it isn’t possible to combine this type of pension with a member’s other superannuation monies,” she reminded SMSF professionals.
“However, a member in receipt of a death benefit pension is permitted to commute some of their pension and take a lump sum payment provided the resulting lump sum is paid out to the member, and if the member hasn’t already taken the minimum pension for the financial year, there will be enough of a balance remaining in the pension account to do so.”
There are also no additional restrictions around how many lump sum payments the member is permitted to take from a death benefit pension, she added.
The super rules that limit a trustee to paying an interim lump sum death benefit and then a final death benefit, she said, have no application here.
“These limits only apply to the initial compulsory cashing of death benefits where the trustee resolves to pay lump sum benefits to beneficiaries and the monies leave the superannuation system,” she explained.
“As such, there is no limit on the number of times a member is permitted to commute part of their death benefit pension and take a lump sum payment.”
Ms Dawson said this is in recognition of the fact that pension payments, to the extent they consist of taxable component, will be assessable income taxed at marginal rates, less a 15 per cent tax offset.
“Whereas a lump sum payment will be non assessable non exempt income provided the beneficiary was a dependent for tax purposes.”
SMSF professionals who are assisting clients with documenting these benefits, she said, need to ensure that a decision by the member to draw the benefit as a lump sum benefit and not a pension payment is made in writing prior to the payment being made.
She also warned SMSF professionals to ensure that any software they are using accounts for the lump sum payment correctly.
“For example, the trustee will not need to withhold tax or issue a payment summary for the lump sum payment from a death benefit pension if the beneficiary was a dependent for tax purposes,” she explained.
“You will also need to ensure you attend to TBAR reporting in respect of the pension commutation.”
Miranda Brownlee
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.
