The short version
- If you’re receiving a pension from your SMSF, it’s worth understanding how your pension arrangements affect the benefits your loved ones may receive and the responsibilities of your fund’s trustees.
- Reversionary pension: Your existing pension automatically continues to a nominated eligible beneficiary under its terms. The trustees do not need to establish a new pension, but administration and reporting obligations still apply.
- Non-reversionary pension: Your pension ceases when you pass away. The remaining balance becomes a death benefit, which may be paid as a lump sum or used to start a new pension for an eligible beneficiary, subject to the applicable rules.
- Transfer balance cap: Reversionary pensions generally receive a 12-month deferral before the beneficiary’s transfer balance account is credited. For a new non-reversionary death benefit pension, the credit generally arises when the beneficiary becomes entitled to it.
- Minimum pension payments: Reversionary pensions continue under the existing pension arrangements. A new death benefit pension has its own minimum payment requirements.
- SMSF documentation: Your trust deed, pension terms and death benefit nominations need to align. A binding death benefit nomination alone does not automatically make a pension reversionary.
- Which arrangement is suitable? Neither is automatically preferable. The relevant considerations include your intentions, family circumstances, beneficiary eligibility and existing pension arrangements.
When planning what happens to your SMSF after your death, the type of pension you have can make a significant difference.
you’re receiving an account-based pension from your SMSF, it’s worth understanding what happens to that pension when you die. Will it automatically revert to your spouse or another eligible beneficiary? Or will your fund’s trustees need to decide how the death benefit is paid?
This is where the differences between reversionary and non-reversionary pensions can affect beneficiary entitlements, pension payments, transfer balance caps and the administration required after death.
What is a reversionary pension?
A reversionary pension is an existing superannuation pension that automatically reverts to a nominated eligible beneficiary when the original pensioner dies.
For example, a member may establish an account-based pension that automatically reverts to their spouse. Provided the arrangement is valid and the spouse remains eligible, the pension continues without the trustees establishing a new death benefit pension.
The beneficiary becomes entitled to the pension from the date of death, although the SMSF still has administrative and reporting obligations.
Importantly, a binding death benefit nomination does not automatically make a pension reversionary. The fund’s governing rules and pension terms must provide for the pension to continue. A death benefit nomination may still be relevant to other interests or to the payment of the benefit if the reversionary arrangement proves ineffective.
A nominated beneficiary must be permitted under superannuation law to receive the death benefit as an income stream. This will commonly be the original pensioner’s spouse. Different and more restrictive rules apply where the nominated beneficiary is a child.
What is a non-reversionary pension?
A non-reversionary pension does not automatically continue to another person when the original pensioner dies.
Instead, the pension ceases and its remaining value becomes a superannuation death benefit.
The trustees must determine how to pay that benefit in accordance with superannuation law, the SMSF’s trust deed and any valid binding directions. Their discretion over the recipient or payment form is limited by those requirements.
Depending on the circumstances, the benefit may be paid as a lump sum, used to commence a new death benefit pension for an eligible beneficiary, or paid through a permitted combination of both.
This arrangement may provide greater flexibility after death as to the permitted form and timing of payment. However, the trustees remain bound by superannuation law, the trust deed and any valid binding death benefit nomination, and additional decisions and documentation will generally be required.
Although a non-reversionary arrangement may allow decisions to be made after death, the trustees must still cash the original pensioner’s death benefits as soon as practicable. It should not be assumed that the benefit can remain unresolved in the fund for an extended period.
Reversionary vs non-reversionary pensions: The key differences
| What to know | Reversionary pension | Non-reversionary pension |
|---|---|---|
| What happens when you die? | Your existing pension automatically reverts to your eligible nominated beneficiary. | Your pension stops, and the remaining balance becomes a death benefit. |
| Who receives the benefit? | The eligible beneficiary named in your valid reversionary pension arrangement. | The recipient and form of payment are determined by the superannuation legislation, the fund's rules and any valid death benefit directions. |
| Does a new pension need to start? | No. Your existing pension continues. | Yes, if an eligible beneficiary receives the benefit as a pension. |
| When does it count towards the beneficiary's transfer balance cap? | Generally 12 months after death, using the pension's value at death. | When the new pension starts, using its value at that time. |
| Can the arrangements change after death? | Generally less flexibility because the beneficiary is already specified. | Potentially more flexibility over the permitted form and timing of payment, subject to superannuation law, the fund's governing rules and any valid binding directions. |
| What must the trustees do? | Continue pension payments and update the fund's records and reporting. | Arrange payment of the death benefit, complete the necessary documents and start a new pension if applicable. |
Neither arrangement is automatically preferable. The relevant considerations depend on the member’s intentions, family circumstances and fund documents.
What happens to pension payments after death?
The distinction also affects minimum pension requirements.
For a reversionary pension, the existing pension continues after death. Payments made to the original pensioner before death, together with payments subsequently made to the reversionary beneficiary, generally count towards satisfying the annual minimum for that pension for the financial year of death. The minimum is not recalculated simply because the pension has reverted.
From the following 1 July, the minimum is calculated using the pension balance at that time and the reversionary beneficiary’s age.
For a non-reversionary pension, the original pension ceases. If an eligible beneficiary subsequently starts a new death benefit pension, that pension has its own minimum payment requirements.
The first year’s minimum is generally calculated proportionately from commencement. However, an account-based pension commencing on or after 1 June generally has no minimum payment requirement for that financial year.
Payments made to the deceased under their original pension do not count towards the minimum for the new pension.
How does the transfer balance cap apply?
The transfer balance cap limits the amount an individual can transfer into the tax-free retirement phase of superannuation.
Death benefit pensions generally count towards a beneficiary’s personal cap, but the timing and value of the credit differ between the two arrangements.
Reversionary pensions: A 12-month deferral
For a reversionary pension, the transfer balance account credit generally arises 12 months after death, based on the pension’s value at the date of death. The pension itself reverts at death; only the transfer balance account credit is deferred.
Example: Sarah dies with a reversionary pension valued at $900,000. Her spouse, Michael, becomes entitled to the continuing pension immediately.
However, the $900,000 transfer balance account credit generally arises 12 months later. Changes in the pension’s market value during that period do not alter the credit.
This gives Michael time to review his existing retirement phase interests and take any necessary action to remain within his personal cap.
The deferral applies to the transfer balance account credit, not to pension payments or the SMSF’s ongoing obligations.
Key point: A reversionary pension transfers automatically under its existing terms. A binding death benefit nomination alone does not convert a non-reversionary pension into a reversionary pension.
Non-reversionary pensions: A credit at commencement
For a non-reversionary pension, the credit generally arises when the eligible beneficiary becomes entitled to a new death benefit pension. Its value is based on the amount used to commence that pension.
Example: A member dies with a non-reversionary pension valued at $900,000.
Several months later, the trustees establish a death benefit pension for the original pensioner’s eligible spouse. If the commencement value is $930,000, the transfer balance account credit would generally be $930,000.
These differences can be significant where the beneficiary already receives their own retirement phase pension.
What if the beneficiary has insufficient cap space?
A beneficiary may need to review their existing pension arrangements before receiving a death benefit pension.
Depending on the circumstances, the beneficiary may be able to create transfer balance cap space by partially or fully commuting one of their own retirement-phase pensions back to accumulation phase. However, the inherited death benefit itself cannot be transferred to or retained in accumulation phase. Any part of the death benefit that cannot support a permitted death benefit income stream will generally need to leave the superannuation system as a lump sum.
Death benefits cannot simply remain in accumulation phase indefinitely to avoid the cap. Specialist advice is important before making these decisions.
What about Division 296?
Division 296 applies an additional tax to a proportion of superannuation earnings for individuals with large superannuation balances. Receiving an inherited superannuation benefit does not automatically create a Division 296 liability. However, a death benefit pension received by a beneficiary forms part of the beneficiary’s total superannuation balance for Division 296 purposes.
The pension structure may also affect when post-death earnings cease to be attributed to the original pensioner. With a valid reversionary pension, the beneficiary becomes entitled to the continuing income stream immediately on death. With a non-reversionary pension, relevant earnings may continue to be attributed to the deceased until the death benefit is paid or distributed, or a death benefit income stream commences.
Special transitional rules apply for 2026–27: an individual who dies during that income year is not liable for Division 296 tax. For deaths in later income years, relevant post-death earnings may be included in the original pensioner’s Division 296 assessment for the year of death, including earnings reports for a later income year.
These considerations are particularly relevant to larger-balance SMSFs and warrant specialist review.
Why your SMSF documents matter
The effectiveness of either arrangement depends on more than the member’s intentions.
Your SMSF’s trust deed, pension commencement documents and death benefit nominations should work together.
For example, a member might assume their pension will automatically pass to their spouse because they have completed a binding death benefit nomination. However, that nomination alone may not establish a reversionary pension.
A reversionary arrangement may also cover only a particular pension interest. Other pension or accumulation interests may require separate death benefit instructions.
Changes in family circumstances can affect whether existing arrangements continue to reflect the member’s intentions.
Questions SMSF trustees should consider
If you’re receiving an SMSF pension or preparing to commence one, consider discussing these questions with an appropriately qualified professional:
- Does your pension automatically revert to an eligible beneficiary?
- Do your trust deed, pension terms and death benefit nominations align?
- Would your beneficiary have sufficient transfer balance cap space?
- Have changes in family circumstances affected your arrangements?
- Do other superannuation interests require separate instructions?
- Are your trustee succession arrangements up to date?
Understanding these matters can help you identify documentation that may need reviewing.
SuperConcepts provides SMSF establishment and ongoing administration support, including assistance with fund records and annual compliance requirements. The establishment or review of death benefit arrangements may also require legal, financial and taxation advice from appropriately qualified professionals.
References
[1] Superannuation Industry (Supervision) Regulations 1994 (Cth), regs 6.17A and 6.21 — death benefit nominations, compulsory cashing and eligible beneficiaries.
[2] Australian Taxation Office, Taxation Ruling TR 2013/5 — Income tax: when a superannuation income stream commences and ceases.
[3] Australian Taxation Office, Law Companion Guideline LCG 2017/3 — Superannuation death benefits and the transfer balance cap.
[4] Income Tax Assessment Act 1997 (Cth), Division 294 — transfer balance accounts and credits arising from death benefit income streams.
[5] Superannuation Industry (Supervision) Regulations 1994 (Cth), reg 1.06(9A) and Schedule 7 — account-based pension standards and minimum payment requirements.
[6] Australian Taxation Office, Pension standards for self-managed super funds.
[7] Income Tax Assessment Act 1997 (Cth), Division 296 — additional tax on certain superannuation earnings, including provisions relating to deceased members.
[8] Income Tax (Transitional Provisions) Act 1997 (Cth), s 296-1 — application of Division 296 and the 2026–27 transitional exemption.
[9] Income Tax Assessment (1997 Act) Regulations 2021 (Cth), reg 296-70.04 — attribution of superannuation earnings following a member’s death.
Important information
This article contains general information only and does not take into account any person’s objectives, financial situation or needs. It is not personal financial, taxation or legal advice. The treatment of reversionary and non-reversionary pensions depends on the fund’s governing rules, pension documents, beneficiary eligibility and individual circumstances. Trustees should seek appropriately qualified advice before making decisions about pension and death benefit arrangements.
