Monthly technical briefing - December 2025

Recent developments

Welcome to the December Adviser query of the month and technical briefing, an update of recent key technical developments for financial advisers for the period from 27 October 2025 to 26 November 2025.

In this edition, the Adviser query of the month considers the differences between taking a lump sum and pension payment when withdrawing more than the minimum from a death benefit pension.

Adviser query of the month

Lump sum or additional pension payment from a death benefit pension

Question

My client has a death benefit account based pension due to the death of their spouse.

They need to withdraw more than the minimum pension for the year.

Should they take the additional amount as a lump sum or an additional pension payment?

Note: The scenario assumes the fund is a taxed super fund.

Answer

There are a number of technical considerations when deciding on the classification of the payment.

It’s important to keep in mind that the classification decision must be made before the payment is made. The ATO are of the view that the classification can’t be amended once it is made. Therefore consideration of the issues should occur in advance of the payment.
 

Taxation

Pensions paid due to death retain the death benefit status indefinitely. As a result, lump sum and pension payments will be taxed as death benefits irrespective of when the pension commenced.

Given this, the difference in the taxation of a lump sum and pension payment can only arise when the recipient is under age 60 at the time of payment. Once they’ve received aged 60, both lump sum and pension payments are tax free.

Lump sums – the table below outlines how lump sums are taxed based on who receives the payment.

In this scenario (involving a spouse of the deceased), they will be considered a dependent of the deceased and therefore payments will be tax free. 

* This component is added to the individual’s assessable income. The individual receives a tax offset to limit the rate of tax to 15 per cent.

Pension payments – the taxation of pension payments depends on:

1. The age of the pension recipient at the time of payment, and
2. The age of the deceased at the time of death.

The following table outlines the various scenarios:

Somewhat related to taxation is the impact the decision might have on income tests that include assessable income. For example, Family Tax Benefits (FTB) A and B incorporate assessable income in their income test.

For a client that is under 60, where their spouse died while under 60, the taxable component of a pension payment (as opposed to a lump sum) will increase the income assessed for FTB purposes, potentially reducing their entitlements. Other areas that could be negatively impacted by taking a pension payment include:

• Spouse contribution tax offset
• Government co-contribution
• Paid parental leave
• Child care subsidy
• Low income super tax offset (LISTO)
• Medicare levy surcharge
• Private health insurance rebate
• Division 293 tax – contributions tax for higher income earners.
   

Transfer balance cap (TBC)

Credits and debits counting towards a client’s transfer balance cap (TBC) are only created by new benefits moving into the tax free pension phase and commutations from pensions.

Pension payments are not commutations and don’t affect the individual’s transfer balance account.

In contrast, lump sums (from a commutation) result in a debit in the client’s transfer balance account.

Given this, taking a lump sum provides the better TBC outcome. However, whether a transfer balance debit is useful will depend on the client’s circumstances.  Circumstances where creating TBC space could be useful include:

• Client is yet to satisfy a condition of release to start a pension with their own super benefits and creating the TBC space will allow them to move additional accumulation benefits to a pension
• Client commuted their own pension to create TBC space to take the death benefit pension. In these circumstances, taking the additional payment from their accumulation account may be simpler though there may be reasons for taking the payment from the pension instead. By taking the lump sum from the pension account and creating additional TBC space, additional accumulation benefits can be moved to a pension.
   

Centrelink and aged care

Centrelink and aged care income tests assess account based pensions in the same way.

The payment will only directly affect the client’s assessed income for income test purposes where the pension is ‘grandfathered’ under the pre-1 January 2015 rules. Refer to call out box below for qualifying criteria.

If the pension is not grandfathered, the payment will not be treated as income. Their assessed income will continue to be calculated by applying the deeming rate(s) to the account balance.

The income test amount for grandfathered pensions is determined in the following way:

For a non-reversionary pension, the life expectancy used is the client’s life expectancy when the death benefit pension started. For a reversionary pension, it is the longer of the life expectancies of the deceased and the client at the time the pension started.

The income test treatment of a payment from a grandfathered pension is as follows:

• Pension payment – Adds to the ‘Annual payment’.
  
  The annual payment is averaged over the period of 26 fortnights.

It will only increase the amount of income assessed until a new amount is calculated for the next income year and Centrelink/DVA are informed of the new amount. Therefore, taking the additional pension payment later in the income year (i.e. closer to 30 June) will reduce the period the payment is assessed as additional income.

• Lump sum – A lump sum is a commutation and affects the deduction amount.
  
  Lump sum commutations have a lasting effect as they continue to be included in the calculation of the deduction amount going forward.

Additional technical planning considerations

Estate planning

In some instances, a client will have non-death super/pension benefits plus a death benefit pension where they want independent beneficiaries (often adult children) to receive their super benefits when they pass away. These clients may also want to reduce the amount of super death benefits tax their children pay when they pass away.

Further, the mix of tax components between their accounts could be quite different.

Taking the additional payment from the account with the greater proportion of taxable component will help reduce the taxable component and potential death benefits tax when paid to the client’s beneficiaries.

Flexibility

Again, for someone that has both a death benefit pension and their own super/pension, choosing to take the additional payment from the death benefit pension may provide the greater level of flexibility.

Death benefit pensions have a ‘cashing’ requirement attached to them. This effectively means they can’t be moved to the accumulation phase and retained there. A commuted benefit must either be paid as a new death benefit income stream or paid out of the super environment.

Non-death benefits don’t have a cashing requirement and therefore offer greater flexibility. Should it be appropriate, these benefits can be retained in the accumulation phase indefinitely.

Therefore, choosing to reduce the death benefit pension will provide a greater level of flexibility.