Death benefits and the minimum pension requirement
Question
My client’s husband passed away in February 2025 while receiving an account-based pension (ABP) that commenced 10 years ago. The spouse is now receiving the death benefit as an ABP.
How is the minimum pension for the 2025-26 year calculated?
Answer
Ensuring the minimum pension is paid during the year is a key requirement to maintain the tax-free status of earnings within the pension.
Failure to pay the minimum pension can result in the pension being treated as ceasing from the start of the financial year and earnings within the pension will be subject to tax. There are additional tax implications of failing to pay the minimum pension, such as transfer balance cap transactions and a recalculation of the tax components. In addition, all payments will be regarded as lump sums. Further information can be found in the 'when minimum pension standards aren’t met' article on the ATO site.
There are circumstances when the ATO will allow the pension to continue for tax purposes. Further information can be found in the exception to minimum pension payment requirements section of on the ATO site.
The following table summarises the minimum pension requirement for an APB in the year of death under various scenarios:
| Scenario | Type of account held by deceased | Death pension paid due to reversionary nomination? | Deceased’s account - minimum pension up to date of death | Beneficiary’s account – minimum pension |
|---|
1
| ABP
| Yes
| - Existing pension considered to continue to beneficiary
- Beneficiary takes on minimum calculated for deceased**
- Sum of pension payments to deceased and beneficiary count towards the minimum for the year
- No minimum if deceased commences pension and dies in June of same year
|
2
| ABP
| No
| - Pension ceases on death
- No minimum pension required before death
| - Considered a new pension
- Pro-rate minimum based on number of days in financial year (including commencement day)
- Percentage factor based on beneficiary’s age at commencement
- No minimum if beneficiary’s pension commences in June
|
3
| Accumulation
| N/A*
| N/A
| - Pro-rate minimum based on number of days in financial year (including commencement day)
- Percentage factor based on beneficiary’s age at commencement
- No minimum if beneficiary’s pension commences in June
|
* Reversionary nominations are a continuation of the pre-death pension and therefore don’t apply to accumulation accounts
** In the year after death, the minimum payment percentage is based on the beneficiary’s age at 1 July
In this client’s circumstances, the spouse falls into either scenario one or two.
In the case of scenario one, where they receive the death benefit pension due to a reversionary nomination, then the deceased’s minimum pension is carried over to the beneficiary.
In the case of scenario two, where the ABP is not paid due to a reversionary nomination (e.g. there was a non-lapsing nomination, binding lapsing nomination, non-binding nomination or no nomination), the ABP is considered a new pension and the minimum pension is pro-rated based on the beneficiary’s age at the time it commences.
The table above assumes the individual beneficiary doesn’t commute the pension in full before the end of the financial year. Were this to occur, any minimum pension would need to be pro-rated to account for the reduction in days the pension was running.
If the deceased had a transition to retirement income stream (TRIS) at the time of death, then scenarios one and two in the table above apply. In addition:
- The death benefit pension (whether reversionary or not) is considered to be in the tax-free pension phase
- The annual 10 per cent maximum pension rule no longer applies
- The limitation regarding lump sum payments no longer applies.
If the deceased had a market-linked pension/term allocated pension (TAP) at the time of death, then the following apply:
- For pensions with a reversionary nomination, scenario one in the table applies
- For non-reversionary nominations, the TAP ceases at the time of death. For a beneficiary who is eligible to receive a pension, they will be able to take a pension, lump sum or a combination of the two. A death benefit pension is a new pension. The beneficiary can choose the type of pension (eg ABP) that suits their circumstances.
