Australian Pension Death Benefits: How Payouts Work After You Pass Away

Quick Takeaways

• Most Australian pensions provide either a lump‑sum death benefit, a reversionary pension for a spouse, or a payout to nominated beneficiaries.
• Tax on death benefits depends on the recipient’s relationship to you and whether the benefit comes from a taxed or untaxed source.
• Claiming a payout requires proof of death, the fund’s claim form, and identification of the eligible recipient.
• Choosing the right beneficiary now can avoid probate delays and extra taxes later.
• Regularly review your superannuation death‑benefit nominations, especially after major life events.

When someone passes away, the way their Pension is a regular income stream usually funded by superannuation that provides retirees with money during retirement is settled can feel confusing. This guide breaks down the main options, who can claim them, and what taxes apply in Australia.

What Happens to a Pension When the Member Dies?

In Australia, most retirees draw their income from an Superannuation Fund that holds their savings in a tax‑advantaged environment. When the fund member dies, the superannuation trustee must decide how to distribute any remaining balance. The distribution follows the rules set out in the Superannuation Industry (Supervision) Act 1993 (SIS Act) and the member’s nomination form.

There are three primary routes:

1. A lump‑sum death benefit paid directly to a nominated beneficiary.
2. A reversionary (or survivor) pension that continues to pay an income stream, usually to a spouse or a dependent.
3. A payout to the member’s estate, which then goes through probate and may be subject to different tax treatment.

Key Types of Death Payouts

Who Can Receive a death benefit?

The SIS Act defines three categories of eligible recipients:

• Spouse or de facto partner - automatically entitled to receive the death benefit tax‑free if the super is taxed within the fund.
• Dependent child - includes children under 18, full‑time students under 25, and financially dependent children of any age.
• Any other nominated person - the member can name a friend, parent, or charitable organization. Tax treatment varies.

When you fill out a Beneficiary nomination form, you tell the trustee exactly who should get the payout. If you die without a nomination, the trustee follows the default rules (spouse first, then dependents, then estate).

Understanding the Reversionary Pension

A reversionary pension is essentially the same income stream you were receiving, transferred to your surviving partner. It continues until the partner dies, the fund runs out of money, or the partner decides to cash it out.

Key points:

• It only applies to account‑based pensions (not defined‑benefit pensions).
• The surviving partner can usually keep the same payment amount, but the fund may adjust for any lump‑sum taken beforehand.
• Because the income is tax‑free for Australian residents, it’s a popular choice for couples.

Tax Implications of a pension death benefit

Tax rules hinge on two factors: the source of the super (taxed or untaxed) and the relationship of the recipient.

1. Taxed source - Most modern super funds are taxed at 15% within the fund. In this case, the lump‑sum is tax‑free for a spouse, partner, or dependent child. Other beneficiaries may pay tax on the taxable component, calculated at their marginal rate.
2. Untaxed source - Some public sector or military super schemes have untaxed components. If a non‑spouse receives the benefit, the taxable component is taxed at 45% plus the Medicare levy.

If the payout goes to the estate, the super is taxed at the highest marginal rate (45% + Medicare) unless the fund can allocate a tax‑free component.

Step‑by‑Step: Claiming a Death Benefit

Ready to claim? Follow this checklist to avoid delays:

1. Gather required documents - Certified death certificate, proof of identity for the beneficiary, and the member’s superannuation account details.
2. Contact the fund - Use the fund’s dedicated claims phone line or online portal. Ask for the specific claim form.
3. Complete the claim form - Fill in the beneficiary’s details exactly as they appear on the nomination. If there’s no nomination, indicate the relationship (spouse, child, etc.).
4. Submit supporting evidence - Attach the death certificate, ID proof, and any legal documents (e.g., a grant of probate if paying the estate).
5. Await the fund’s decision - Funds usually process a claim within 20-30 business days. They may request additional information.
6. Receive the payout - The fund will either transfer a lump sum to the nominated bank account or set up a reversionary pension.

Tip: Keep copies of everything and note the claim reference number for follow‑up.

Common Pitfalls and Pro Tips

• Out‑of‑date nominations - Life changes (marriage, divorce, birth of a child) instantly affect eligibility. Review nominations at least annually.
• Assuming probate is needed - A properly nominated beneficiary bypasses probate, speeding up the payout.
• Mixing tax‑free and taxable components - Ask the fund for a breakdown. You may be able to withdraw the tax‑free portion first.
• Choosing the wrong payout type - A lump sum may be preferable for a one‑off need, while a reversionary pension provides steady income for a surviving spouse.
• Ignoring state laws on intestacy - If you die without a nomination, the estate follows state intestacy rules, which can send the benefit to unintended parties.

Frequently Asked Questions

Understanding how a pension death benefit works can spare your loved ones from paperwork headaches and unexpected tax bills. Keep your nominations current, know the payout options, and follow the claim steps promptly - that’s the best way to protect the people you care about.