Dual Pension Strategy: Reducing Tax On Inherited Super

1. When the member has both dependent and non-dependent beneficiaries

Dependent beneficiaries can be named to receive the balance of the pension that contains a significant taxable component, while the non-dependent beneficiaries are nominated to receive the tax-free pension.

When the member dies, no tax is payable on the benefit because the dependent beneficiaries are not required to pay tax on the taxable component they have inherited and the non-dependent beneficiaries have received only tax-free amounts.

2. When the member has only non-dependent beneficiaries, or non-dependants will inherit the remaining balance after both partners have died

The minimum can be withdrawn from the tax-free pension, while all additional income and desired lump sum withdrawals are taken from the pension that contains a taxable component. This maximises the tax-free component that remains after death because withdrawals from it are kept to the lowest level that is permitted.

Tax on the death benefit is lower than it would otherwise be because the taxable amount has been reduced.

The following examples help illustrate the strategy.

Example 1: Mix of dependent and non-dependent beneficiaries

Jane is 74 years old and has an account-based pension balance of $500,000 with a 100% taxable component. Jane has two adult children, Ben and Harvey. Ben is independent but Harvey has a disability and relies on Jane for financial support.

Jane wants to leave her sons half her super balance each after her death.

If Jane passed away today, Harvey would receive $250,000 tax free as a dependant. However, because the balance is 100% taxable, Ben would pay up to 15% tax plus 2% Medicare levy on his portion, or $42,500. If the benefit was first directed into Jane’s estate before being distributed, the Medicare levy would not apply.

Jane decides to withdraw and recontribute the portion she wants Ben to inherit, converting it to a tax-free amount. Her withdrawal of $250,000 goes from her account-based pension into her bank account. She then uses the money to make a non-concessional contribution to a new accumulation account she has opened. The amount is within the contribution cap thanks to the bring-forward rule.

Jane immediately uses the new account to start a second pension, made up of a 100% tax-free component from her non-concessional contribution.

Next, she makes binding death benefit nominations on her two pensions. She nominates Ben to receive the tax-free pension and Harvey to receive the pension that contains a taxable component.

Now, Jane can be confident that neither of her sons will pay tax on her remaining super balance after she passes away. Harvey will pay no tax because he is a tax dependant and Ben will pay no tax because he will inherit the pension that is 100% tax free.

Using the contribution to start a pension locks in the 100% tax-free amount. If Jane had instead left it in her accumulation account, future investment growth would have been added to the taxable component.

Example 2: Non-dependent beneficiaries will inherit the remaining balance when the second partner dies

Lin and Bao are both aged 74 and married. Lin has no super and Bao has $1 million in his account.

Bao has not yet started a pension, but he was intending to start one soon and nominate Lin as his reversionary beneficiary. He was not worried about tax because he knows that as his spouse, Lin is a dependant and will inherit the super tax free.

The couple’s adviser pointed out that while Lin can inherit the amount tax free, she may die before Bao or if she dies second, she may still have a balance remaining in the reversionary pension. In either case, any remaining money in super will be left to their adult children who will pay tax on the taxable component.

Lin and Bao have decided this is important and they have a last-minute opportunity to use a recontribution strategy while they are under 75. Further non-concessional contributions are not possible after turning 75, although a downsizer contribution may still be an option.

Bao’s account currently has the following tax components:

Bao withdraws $780,000, leaving $220,000 in his account. The remaining balance has the following tax components:

Bao and Lin both open new accumulation accounts in Bao’s current super fund and contribute $390,000 per person (half each from the amount Bao withdrew). This is the maximum non-concessional contribution using the bring-forward rule in 2026–27.

Bao notifies the fund that he is deliberately keeping two separate accounts, so they are not automatically consolidated into one, which would negatively impact the strategy.

The couple immediately apply to use their new accounts to start pensions. A few days pass while the fund processes their applications, and the tax components of their accounts on the day the pensions are opened are shown below. A taxable component has been generated from investment growth during the processing time, but it is small.

The two pensions started from these new accounts will remain 99.9% tax free until they are closed. This gives the couple confidence that anything remaining in either of these pensions after they both pass away will go to their children almost completely tax free (only 0.1% of their payment will be taxable).

Bao then applies to use his other account to start another pension in his name. The balance has changed slightly while the rest of the process was underway. The tax components on the day the pension starts are shown below. You can see the tax-free component is the same as it was immediately after his withdrawal, but the taxable component has increased with investment growth.

The pension started with this account will have a 95.1% taxable component.

Bao and Lin will withdraw the minimum payments required from their tax-free pensions every year and take all the additional income they need and any lump sum withdrawals for one-off expenses like holidays, from Bao’s second pension that contains the taxable component.

Because they are aged 60 or older, their super withdrawals are all tax free, no matter whether they come from the taxable component (taxed element) or the tax-free component.

Lin and Bao expect that they will use the entire balance of the pension that holds a taxable component over the next five years because they want to travel extensively. After it is spent, they will have only the pensions that are mostly tax-free component, which can be inherited by their children free from tax.

If the couple had been younger when they completed their recontributions, they could have considered a multi-year strategy to convert their entire balance to the tax-free component.