A reversionary pension is an income stream the Trustees set up with superannuation that automatically transfers the pension to another person (usually called the reversionary beneficiary) on the death of the Member.
Beneficiary of Reversionary Pension
- Be a spouse of the Member
- Be a child of the member:
- Who is less than 18 years of age; OR
- 18 or more years of age and less than 25 years of age AND financially dependent on the Member; OR have a disability (as defined in the Disability Services Act 1986)
- Be in an interdependency relationship with the Member:
- They have a close personal relationship
- They live together
- One or both of them provide for the financial and domestic support and personal care of the other
If the Trustee do not have a spouse, a child or a person in an interdependency relationship to nominate as a reversionary beneficiary, the Trustee may need to consider nominating a legal personal representative to receive the super using a binding death benefit nomination (BDBN). Please click here for more information on binding death benefit nomination (BDBN) and estate planning.
Setting up a Reversionary Pension for SMSF
Before establishing a Reversionary Pension, it is prudent to discuss with your family, legal advisor or financial advisor who oversee your estate planning needs that who you want to be the beneficiary of your pension after your death.
In regards to SMSF, at first ensure the options for payment of death benefits in SMSF Trust Deed and whether or not a reversionary pension nomination has priority over a Binding Death Benefit Nomination.
The Trustee must commence a pension and nominate the Beneficiary of a Reversionary pension. The income stream will automatically continue to the reversionary nominee. No external decision needs to be made by the Trustees of the SMSF other than confirming the nomination of Reversionary pension.
We use BGL to prepare the set of financial reports for the SMSF annual return lodgment. BGL offers a Member service where a Reversionary Pension can be added through BGL 360. BGL provide further guidance here.
Benefits of a Reversionary Pension
A reversionary pension can have the following benefits:
- Estate security
There is generally more certainty under a reversionary pension, that the nominated beneficiary will receive the pension.
- More seamless legal transfer
Reversionary pensions are rarely challenged as they are fixed in place generally at the start of the pension when the Member has the capacity to nominate a beneficiary.
In the event where the original owner of the pension passes away, a reversionary pension will generally transfer seamlessly to the nominated beneficiary and does not form part of the deceased’s estate. BDBNs, in comparison, has been found often poorly executed (e.g. not made in writing, not signed by the appropriate parties or witnessed correctly) which means they can be more open to being challenged in the courts.
- Retain the funds within the SMSF
In the even where the super pension is paid out as a Lump Sum death benefit, the beneficiary may face contribution cap restrictions depending on the age. However, with a reversionary pension the funds will remain in the superannuation system.
- Tax benefits for retaining funds in a pension
After receiving a reversionary pension, the pension may be tax-free or taxed at a concessional rate of 15%, depending on the age of nominated person and the age of the deceased Member. According to the ATO, to work out how your reversionary pension may be taxed you need to know how much of the money in your death benefit income stream is a tax-free component or taxable component. Please click here for more information on the ATO guidance.
- Extra time for coordinating financial affairs
There is a 12-month delay before the receipt of a reversionary pension affects the receiving beneficiary’s own transfer balance account report. This gives the beneficiary more time to get their own financial affairs in order. This is very helpful particularly if the nominated beneficiary has a pre-existing pension and the sum of the two exceeds the $1.7 million transfer balance cap set by the government. During this 12-month delay the income stream from the reversionary pension will continue. In contrast, for a pension that is not reversionary, the credit arises immediately once the decision is made to pay the death benefit as a pension.
Drawbacks of a Reversionary Pension
A reversionary pension can have the following drawbacks:
- Limited beneficiaries
A reversionary pension can have only one reversionary. If the Member wishes to split the proceeds among numerous beneficiaries, they will have to consider multiple pensions. In that case, one pension will revert to the spouse and other will revert to a disabled child.
- Tax implications
The value of a reversionary pension will count towards a reversionary beneficiary’s transfer balance cap. Please click here for more information on transfer balance cap.
Depending on your circumstances, there are potential benefits and drawbacks of a reversionary pensions. It may be prudent to discuss with a legal professional or an adviser to determine what strategy may suit you the best.