In short

When a member receiving a non-reversionary account-based pension dies, the pension stops at death and the regulated minimum drawdown is pro-rated to that date. Only payments made before death count — a lump sum scheduled for later in the year can't retroactively satisfy it. If the pro-rata minimum wasn't met, the pension may be treated as never having been a pension for the year, losing tax-free treatment.

For most working life, the regulated minimum drawdown on an account-based pension is a quiet, predictable rule. The fund pays at least the prescribed percentage of the pension balance each year, the percentage rises with age, and the system runs on autopilot. A pensioner aged 65–74 must receive at least 5% of the 1 July balance each year; a pensioner aged 80–84 must receive at least 7%; and so on, up to 14% from age 95.

The rule is not optional. If a pension fails to meet the minimum by 30 June, the ATO position is that the pension is deemed not to have been a pension for the year. The fund's pension phase tax treatment for the relevant period can be challenged, with the earnings instead taxed at 15% as accumulation phase income.

For most pensions, the rule is met without conscious effort. The fund schedules regular payments — monthly, quarterly, or in some cases a single annual lump sum near year-end — and the year's minimum is achieved. The trap, where it exists, is the year-end one: a pension paying once a year in late June is exposed if for any reason the payment is missed.

A separate and less commonly considered version of the trap applies to mid-year deaths.

What is the mid-year death problem?

The mid-year death problem. When a member who is receiving a non-reversionary account-based pension dies, the pension stops automatically at the date of death. The fund's obligation to make the regulated minimum payment for the year applies to the period the pension was on foot — that is, from 1 July (or pension commencement, for a pension started during the year) to the date of death.

The minimum obligation is pro-rated. So if a pension recipient with a $25,000 annual minimum dies on 31 December, the fund's obligation for that year is half — $12,500 — measured against the payments made before 31 December.

The critical practical point: payments made after the date of death cannot count toward the regulated minimum. Once the member dies, the pension has ended; any subsequent withdrawal from the deceased's interest is a death benefit, not a pension drawdown. There is no opportunity for the fund to "catch up" by making a lump-sum payment after death.

If the pro-rata minimum has been met by the date of death, the pension is treated as a pension up to that point, with normal pension phase tax treatment. If not, the pension may be treated as having ceased on 1 July — with the earnings on the balance for the period taxed at 15% rather than tax-free.

How do two different payment schedules compare?

Two scenarios — same member, different schedules.

Scenario one: monthly payments. A 65-year-old member with a $500,000 pension balance has a 5% minimum of $25,000, scheduled as monthly payments of approximately $2,083. By 31 December — the halfway point — the fund has paid six monthly payments totalling about $12,500. The pro-rata minimum to that date is $12,500. If the member dies on 31 December, the fund has met the obligation; pension phase tax treatment is preserved for the period.

Scenario two: annual lump sum scheduled for June. Same member, same balance, same 5% minimum. But the payment schedule is a single annual lump sum to be paid on 25 June each year. The member dies on 31 December. By that date, no payments have been made for the year. The pro-rata minimum to 31 December is $12,500; payments to that date are zero. The minimum has not been met. The fund may face an ATO assessment on the pension phase status of the deceased's pension for the period.

The annual-lump-sum approach is more common than people might assume. It is easier administratively (one transaction per year instead of twelve), it can be timed to suit the member's tax position, and it minimises the funds-flow disruption. But it concentrates the compliance risk into a single late-year event — and any disruption to that event, including the member's death, leaves the fund exposed.

How is a reversionary pension different?

The reversionary pension is structurally different. When the pension is reversionary to a spouse, it does not stop at death. The pension continues to the named reversionary, with the same balance and the same minimum obligation. Payments made before death (to the original member) and after death (to the reversionary) both count toward the annual minimum. The reversionary spouse can take additional payments in the period to 30 June to ensure the annual minimum is met.

For couples planning ahead, this is one of several structural reasons to prefer reversion: it avoids the mid-year-death compliance question entirely. The pension keeps going; the minimum keeps applying; the survivor can manage the remaining drawdowns to meet the annual figure.

What is the practical management approach?

The practical management approach. Two principles handle most of the risk.

First, prefer regular payment schedules over annual lump sums. Monthly or quarterly payments build compliance through the year. Each scheduled payment is a small step toward the annual minimum; even if the member dies mid-year, the cumulative amount typically meets or exceeds the pro-rata threshold. The administrative cost of monthly payments is essentially zero — the fund or platform handles it automatically — and the compliance protection is meaningful.

Second, run a quarterly compliance check. For SMSFs in particular, where the trustee has direct compliance responsibility, a simple check at the end of each quarter — "what is the year-to-date payment, and is it on track for the annual minimum?" — catches most deficits early enough to remediate. A deficit at Q2 can be addressed with a Q3 catch-up payment. A deficit found at the member's death is too late.

What should the trustee do on the day of death?

On the day of death — the trustee's checklist. When a member dies, the trustee's immediate post-death checklist for an SMSF should include:

  • Calculate the pro-rata regulated minimum for the year to date of death.
  • Verify the year-to-date payments against the pro-rata minimum.
  • Document the compliance position in the trustee minutes.
  • For reversionary pensions, brief the reversionary on remaining minimum payments needed by 30 June.
  • For non-reversionary pensions, no further pension drawdown is possible — the death benefit administration takes over.

For public-offer fund pensions, the fund typically handles pro-rating automatically — the fund's product is designed for the routine case, and the administration is invisible to the member's family. The risk concentration is in SMSF cases where the trustee is responsible for the calculation.

The wider point. The regulated minimum drawdown rule is a quiet feature of pension administration that is easy to forget about until it isn't. For most members in most years, regular pension payments meet the requirement without conscious effort. The mid-year death scenario is the exception — and the exception that catches funds that have not built compliance through the year.

For SMSF trustees, advisers, and members making pension setup decisions, the simple choices — monthly payments rather than annual lump sums, reversionary pensions rather than non-reversionary, quarterly compliance checks rather than year-end audits — handle the risk almost entirely. The compliance is structural, not heroic. It just needs to be set up that way at the beginning.

Sources

Key takeaways

  • A non-reversionary pension stops automatically at the member's death, and the regulated minimum drawdown obligation is pro-rated to the date of death, not the full year.
  • Only payments made before death count toward the pro-rata minimum — any payment made after death is death benefit administration, not a pension drawdown, and can't retroactively fix a shortfall.
  • Funds paying an annual lump sum late in the year (e.g. late June) carry the most risk, since a death before that payment leaves the pro-rata minimum unmet.
  • Reversionary pensions avoid this problem entirely — the pension continues to the reversionary beneficiary, and payments before and after death both count toward the annual minimum.
  • Monthly or quarterly payment schedules, combined with a quarterly compliance check, build up the pro-rata minimum through the year and largely eliminate the mid-year-death risk.

Frequently asked questions

What happens to the minimum pension drawdown if the member dies during the year?

The pension stops at the date of death, and the regulated minimum payment obligation is pro-rated to that date rather than applying to the full financial year. Only payments actually made before death count toward that pro-rata figure.

Can a fund make a catch-up payment after the member's death to meet the minimum?

No. Once the member dies, the pension has ended, and any further payment from the deceased's interest is a death benefit, not a pension drawdown. There is no way to retroactively satisfy the pro-rata minimum after death.

What happens if the pro-rata minimum wasn't met before death?

The pension may be treated as not having been a valid pension for the year, meaning the earnings on the balance during that period could be taxed at 15% as accumulation-phase income instead of receiving tax-free pension-phase treatment.

Does a reversionary pension avoid this mid-year-death risk?

Yes. A reversionary pension continues to the named reversionary beneficiary rather than stopping at death, so payments made both before and after death count toward the same annual minimum, and the reversionary can top up payments before 30 June if needed.

A note on advice. This article is general information only and doesn't account for your personal circumstances. Everyone's situation is different — before acting, it's worth talking it through with a licensed adviser who knows your full picture.