If an SMSF member dies, does the trustee still need to pay the minimum pension amount?

When an SMSF trustee pays a pension to a member, it needs to ensure that the minimum pension payment requirements are met.

If the member dies, then these requirements come to an end unless the pension continues - and is paid as a death benefit 'reversionary pension' to a dependant beneficiary.

This article outlines the minimum payment requirements when paying a reversionary pension and what happens if those requirements are not met.

Rules relating to minimum pension payments

If the trustee commences paying a retirement phase pension to a member on or after 1 July 2007, then there is a minimum amount that must be paid each year. There is no maximum amount or limit.

The amounts required to be paid vary between 2% and 14% of the pension account balance and vary depending on the member's age and the year in which the payment is made. A useful indicative summary of the minimum pension amounts required to be paid can be found on the ATO website here.

What if a member dies?

There is a general rule in regulation 6.21 of the Superannuation Industry (Supervision) Regulations 1994 (Cth) (SIS Regs) which requires that a super death benefit must be 'cashed' to a beneficiary as soon as possible after the member's death. In addition, subregulation 6.21(2) requires that [emphasis added]:

The form in which benefits may be cashed under this regulation is any one or more of the following forms:

• in respect of each person to whom benefits are cashed:
  • a single lump sum;
• subject to subregulations (2A) and (2B):
  • 1 or more pensions...

Accordingly, where a fund's deed allows for the cashing of a pension to a dependant as a reversionary pension, the member can enter into a Death Benefit Nomination or Death Benefit Agreement in order to direct the trustee as to how to pay of the pension after the member's death.

If the deceased member does not have a reversionary pension arrangement in place, then the minimum pension payment rules do not apply and no minimum pension payment is required to be made in the year of the member's death.

If there are reversionary pension arrangements, then the trustee(s) must continue to ensure that the minimum annual pension amount is being paid to the reversionary beneficiary for as long as the pension is being paid.

What if you fail to make the minimum pension payment?

If the trustee(s) fails pay the minimum amount, then the pension ceases and the trustee(s) may have contravened the SIS Regs by failing to cash the death benefit 'as soon as possible'.

If the underpayment is small, or the result of an error, then the trustee(s) may be able to self-assess whether it can apply an exception under super law and treat the fund as having continuously paid the pension, despite the underpayment. The trustee(s) will not have breached super law if the exception can be applied.

Preventing further breaches

Where the trustee has made an underpayment of a pension - and the pension has ceased - the trustee must ensure that no further breaches of super law occur by ensuring that the death benefits are cashed 'as soon as possible'. The trustee can do so by:

• Cashing the benefit as a lump sum (either a single lump sum, or an interim and final lump sum);
• Cashing the benefit in the form of a new retirement phase income stream as soon as the trustee becomes aware of the breach; or
• Rolling over the interest supporting the reversionary pension to another complying super fund for immediate cashing as a new reversionary pension.

Taking the above steps will prevent future breaches but will not remedy the earlier breach of failing to cash the benefit as soon as possible.

The ATO says on its website, that as long as one of the above steps is taken:

'the Commissioner will accept the trustee is meeting on a go-forward basis the requirement to cash the benefits 'as soon as practicable' and will not therefore have further contravened the SISR. Failure to resolve the matter may have significant compliance consequences.'

More information from Maddocks

For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Commercial team.

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