Know the difference between death benefit pension and normal pension or pay the price
It’s vital to know what is and what is not a death benefit pension because the consequences of not paying the minimum pension payment on the wrong one could have dire consequences, a leading adviser said.
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Peter Johnson, director of Advisers’ Digest, said if a member forgets to meet the minimum payment in a “normal” pension, they will pay tax for that year and then recommence it. However, if they forget to meet the minimum payment on a death benefit pension, “you’re gone”.
Johnson gave an example of an SMSF with two members in pension phase. One member passed away, and their pension reverted to the spouse.
“The question is can the pension that reverted to the surviving spouse be put into accumulation at a later stage or must it then be paid out?” he said.
“Let’s have a look at the transfer balance cap rules. Say, we have Peter and Chloe who start a pension today, each with $2 million. They both have reversionary pensions. Peter dies and his pension automatically reverts to Chloe.
“A TBAR should be done straight away to give the date of death and the $2 million is moved over to Chloe. A TBAR has to be done because it’s a reversionary pension and it shouldn’t impact Chloe’s transfer balance cap.”
Assuming Peter died in January 2026, Chloe’s balance is going to go to $4 million on 1 January 2027.
“At that point in time, Chloe will have a transfer balance cap of minus $4 million, so she’s going to get a notice to commute money back to accumulation of $2 million, but she can’t commute the death benefit pension, because the death benefit must be paid by way of a pension or cash lump sum,” Johnson said.
“You can’t have a death benefit in accumulation, and if you have a death benefit pension, and you forget to pay the minimum, then that’s it. It’s got to come out.”
He said what should happen is that after Peter dies, Chloe has a pension with a balance of $2 million and Peter’s pension is just moved to her so she ends up with $4 million in pension phase.
“There’s going to be a big spot of bother come the first of January. So, you take her personal pension account, the one that’s not Peter’s death benefit, and you commute that back to accumulation,” he said.
“What I always suggest when it is a death benefit pension, is to set it up on monthly payments so they always make the minimum. If they don’t make that minimum payment it might seem like it’s only a small mistake and won’t matter, but that’s not how it works. It’s a massive mistake.
“So force them to do monthly repayments, then if they miss one, you can use the one-twelfth rule and you’ll be OK.”
Keeli Cambourne
March 27, 2026
smsfadviser.com