Superannuation can be complex, particularly when it comes to planning for what happens after death. A recent client question highlighted some common misconceptions around reversionary pensions and death benefits:

“I’m 52 and my wife is 46. We have an SMSF and my balance is $1.7 million and hers is $1.3 million. If I pass away, can my wife keep my super in my name until she turns 60 and then start a reversionary pension? We also hold $800,000 of insurance in super – how would this be paid to her?”

This is a common scenario, and the answer helps to clarify how the rules actually work.

Key Principles

1. Reversionary pensions

A reversionary pension only applies if a pension is already in place.
If the member is still in the accumulation phase at the time of death, there is no pension to revert. Instead, the superannuation balance must be dealt with as a death benefit.

2. Death benefit timing

Superannuation law requires that death benefits are paid “as soon as practicable” after a member’s death. This means funds cannot remain indefinitely in the deceased’s account until a spouse reaches a particular age.

What Happens in Practice?

The surviving spouse will receive the deceased’s superannuation balance plus any insurance proceeds as a death benefit. She will generally have three options:

• Lump sum (withdrawn and held outside super)

• Income stream (a new pension commenced in her name)

• Combination of both

This flexibility allows for structuring in line with personal tax and lifestyle needs.

Insurance Proceeds Inside Super

Life insurance held in super is first credited to the deceased’s account, increasing the member balance. It then forms part of the total death benefit.

Where a valid binding death benefit nomination is in place, the trustee is required to pay the proceeds to the nominated beneficiary, ensuring certainty of outcome.

Tax Treatment

• Lump sum death benefits paid to a spouse are always tax-free.

• Income stream (pension) tax treatment depends on age:

  • If the deceased was aged 60 or over, all payments are tax-free to the spouse.

  • If both were under 60, the taxable portion of the pension is taxed at the spouse’s marginal rate, with a 15% tax offset. Once the spouse reaches 60, all pension payments become tax-free.

Minimum Pension Rules

If the surviving spouse commences a pension, she must draw the minimum annual pension payment, starting at 4% of the balance under age 65. These drawdowns increase with age.

Transfer Balance Cap

The transfer balance cap limits the amount that can be transferred into retirement phase pensions.

• For 2025/26, the cap is $2 million.

• Any superannuation death benefit exceeding this amount must be taken as a lump sum withdrawal.

This is especially relevant for couples with large combined balances and significant insurance proceeds.

Practical Takeaways

To ensure a spouse is financially protected and tax outcomes are optimised:

• Consider starting a pension once eligible, and if appropriate, nominating your spouse as a reversionary beneficiary.

• Put a binding death benefit nomination in place so your intentions are legally enforceable.

• Review life insurance inside super and how it integrates with your total superannuation balance.

• Seek professional advice—the right strategy can make a significant difference to tax outcomes and family security.

Final word:
Death benefits and reversionary pensions are areas where small details can have a big impact. For many clients, setting up the right structures early—such as commencing a pension and ensuring nominations are valid—provides peace of mind that their spouse will be financially secure, with no unnecessary delays or tax costs.