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What happens when a member in pension phase dies before sufficient pension payments have been made?
What’s the story morning glory?
The story is this. Assume Sacheverell (yes, it is a real name and correctly spelt) has retired and taken his superannuation as a non-reversionary income stream in the form of an account-based pension. Given his attained age and commencement balance, the minimum pension amount for the 2019/20 financial year is $20,000.
Sacheverell has no immediate need for the pension payments but is very aware (after reading the preceding article) that one or more pension payments must be made during the 2019/20 financial year which total $20,000. He decides to take out the entire $20,000 in early May 2020 - well before the drop dead date of 30 June 2020 and, having two months in which to address any issues before that drop dead date occurs.
Unfortunately for Sacheverell rather than 30 June 2020 dropping dead, he dropped dead on 1 January 2020. Clearly the minimum pension amount has not been paid (and this cannot be rectified by paying the pension payments after his death).
The question is whether in the pension has breached the pension payments standards and, if so, has Sacheverell’s superannuation interest lost its entitlement to the earnings tax exemption?
Is that all there is Sacheverell?
Surprisingly this issue has not been considered in the technical literature of SMSFs! However, one view (our view) is that there is no loss of the earnings entitlement and further that the entitlement to the earnings tax exemption will continue after Sacheverell’s death until his death benefit is cashed (ie paid as a lump sum or applied to commence a death benefit pension) if that cashing occurs within a reasonable time of his death.
The argument would be that immediately after Sacheverell’s death the pension has ceased to satisfy the pension payments requirements (further, no action can be taken after his death to rectify this position); in short the pension has terminated.
However, for taxation purposes the entitlement to the earnings tax exemption in respect of the superannuation interest, which until Sacheverell’s death, supported the now terminated pension continues. The entitlement to the earnings tax exemption continues because the superannuation interest was, immediately before Sacheverell’s death, supporting a superannuation income stream. Further, there was no breach of the pension payments standards immediately before Sacheverell’s death. Admittedly, in the circumstances of the example, there was a breach of the pension payment standards, immediately after Sacheverell’s death. But the entitlement to the continuation of the earnings tax exemption crystallised immediately before Sacheverell’s death.
What about the weasel qualification of “non-reversionary” pension at the start?
Well there was no weaselling – merely precision. If Sacheverell’s pension was reversionary and the pension reverted to (aka transferred to) Ambrosia, Sacheverell’s wife, then before 30 June 2020 the minimum pension amount of $20,000 must be paid – whether in one payment or two or more payments.
If there is a shortfall in the payment of the $20,000 - re-read the previous article.
If Ambrosia had pre-deceased Sacheverell, and the pension terms had not been changed, then while the pension was still reversionary, the pension would not revert (as the nominated beneficiary had predeceased) and in the absence of a second reversionary beneficiary, the position would be as if the pension was non-reversionary.