Choosing a reversionary beneficiary can help you be clear about who you want to benefit from your remaining super money, and document your wishes correctly. We consider:
- What is a reversionary pension?
- Who can you nominate as a reversionary beneficiary?
- How can you make a reversionary beneficiary nomination?
- Can you change or cancel your reversionary beneficiary?
- How does a reversionary pension differ to a binding death benefit nomination?
- What are the benefits of a reversionary pension?
- What are the drawbacks of a reversionary pension?
- Final considerations and reflections
What is a reversionary pension?
A reversionary pension is an income stream you set up with your superannuation or SMSF that automatically passes to your chosen reversionary beneficiary (such as your spouse) on your death.
Setting up a reversionary pension is a way of telling the trustee of your super fund or SMSF (the person or company managing your super) what you want to happen with your remaining super money, when you pass away.
When a reversionary beneficiary receives the reversionary pension, it will continue to operate under the original terms and conditions of that pension. These can only be applied if you have started receiving your pension, as it is a continuation of the income stream.
Who can you nominate as a reversionary beneficiary?
According to the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act) and supporting regulations, an eligible reversionary pension beneficiary can be:
- A spouse at the time of death
- A child (under age 18)
- A child aged between 18–25 who is classified as a financial dependant
- A child of any age who has a disability, as defined in the Disability Services Act (Cth)
- A person in an interdependency relationship with you (e.g., someone who lives with you and shares a close personal relationship where one or both of you provide for the financial and domestic support and personal care of the other)
It is a good idea to speak with your super fund to determine its rules around reversionary pensions. There may be restrictions on the payment of pensions to people who are not your spouse, and some super funds may only allow you to nominate your spouse.
If you do not have a spouse, a child or a person in an interdependency relationship to nominate as a reversionary beneficiary, you may need to consider nominating a legal personal representative to receive your super using a binding death benefit nomination (BDBN), if this option is available under your super fund.
If you nominate your legal personal representative under a BDBN, then your super benefit will become part of your assets distributed by your will. If you don’t have a will, your super benefit will be distributed according to the laws that concern people who die without a will.
How can you make a reversionary beneficiary nomination?
Before making a decision, it might be worth discussing who you want to benefit from your pension after your death with relevant people, such as your legal adviser, and consider your decision in terms of your overall estate planning.
If you have a retail or industry super fund, you will need to check the options available to you on their pension application forms. Some funds may allow you to nominate a reversionary beneficiary when setting up your pension or during the life of the pension.
When it comes to a SMSF, always read the trust deed (legal document) and see what it says about the options for payment of death benefits and whether or not a reversionary pension nomination has priority over a BDBN.
Consider sourcing the SMSF pension documentation from a quality supplier who has relevant experience and qualifications to ensure the documents are valid, effective and work with your specific deed.
Can you change or cancel your reversionary beneficiary nomination?
If your circumstances, objectives or relationships change then you generally should be able to cancel or change a reversionary nomination through a retail or industry super fund.
However, with most SMSFs you cannot change the nomination and must instead commute the current pension (withdraw a lump sum payment) and commence a new pension with a new reversionary nomination or with a binding death benefit nomination. Some newer SMSF deeds are more flexible so again it is important to read the deed.
Be careful because commuting a pension may mean you lose Centrelink grandfathering (meaning the rules around receiving Centrelink payments may no longer apply) and the new pension may be deemed under the income test (this test helps determine the level of benefit payments you receive).
How does a reversionary pension differ to a binding death benefit nomination?
With a reversionary pension the income stream from your super pension will automatically continue to your reversionary nominee. As such there is no decision to be made by the trustees of the super fund or SMSF other than confirming the reversionary pension nomination. In circumstances when you know exactly who you want your remaining funds to go to, and they qualify to receive it, then a reversionary pension is, in my opinion, an optimal solution.
With a BDBN, the current super pension must cease and the trustees of that super fund or SMSF must decide whether to start a new pension for the nominated beneficiaries (if they qualify) or to pay out the death benefit as a lump sum. So, there is no way under a BDBN to ensure your remaining super funds automatically continues to a beneficiary. However, a BDBN does provides some flexibility for the executors/replacement trustees dealing with complex estates to work out solutions that may not have even been available or considered when a nomination was drafted. Under a reversionary pension, this is generally not possible.
It’s also important to note that while superannuation death benefits usually do not form part of a deceased’s estate, the Supreme Court in New South Wales has the power to bring back into the estate of a deceased person any superannuation paid out from a BDBN and designate these funds as ‘notional estate’ (assets that can be retrieved by court order). In recent years there have been many successful challenges to BDBNs, so it is vital that these nominations are completed correctly and that the instructions in the deed and the trustee’s fiduciary duties are followed in their implementation. A BDBN must also be in writing and signed and dated in the presence of two witnesses for it to be valid.
Some super and SMSF trust deeds may allow a BDBN to override a reversionary pension nomination, however the vast majority do not.
What are the benefits of a reversionary pension?
A reversionary pension can have the following benefits:
- Estate security. Under a reversionary pension there is generally more certainty that the chosen beneficiary will receive the pension if it is noted the decision was made at the outset, when the pension member was more likely to have had the capacity to make their own decision.
- Less pressure to act. By using a reversionary pension there may be more time to grieve and to take your time to deal with other complex financial matters, as the income stream from your pension will automatically continue to the reversionary beneficiary.
- Retain the funds within the superannuation system. If a super pension is paid out as a lump sum death benefit then the beneficiary of that lump sum may be too old to recontribute to their own super or face some contribution cap restrictions. With a reversionary pension this would not occur.
- Extra time for coordinating financial affairs. With a reversionary pension, 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 affairs in order, and may be helpful if they have a pre-existing pension (and the sum of the two exceeds the $1.6 million transfer balance cap set by the government). During this 12-month delay the income stream from the reversionary pension will continue. For a pension that is not reversionary, the credit arises immediately once the decision is made to pay the death benefit as a pension.
- More seamless legal transfer. In the event that the original owner of the pension passes away, a reversionary pension will generally transfer seamlessly to the beneficiary and does not form part of the deceased’s estate (especially important in NSW as discussed above). Reversionary pensions are rarely challenged as they are fixed in place usually at the start of the pension when the member has capacity to nominate a beneficiary. BDBNs, in comparison, are more complex and it has been found often poorly executed (e.g. not made in writing, not signed by the appropriate parties or witnessed correctly) which means they may be more open to being challenged in the courts.
- Centrelink advantage. In some circumstances a reversionary pension may retain Centrelink grandfathering for treatment under the income test (meaning the rules around receiving these payments stay the same). This happens where both the deceased and the reversionary beneficiary were receiving and the reversionary beneficiary continues to receive an Age Pension or holds and continues to hold a Commonwealth Seniors Healthcare card.
- Tax benefits for retaining funds in a pension. When receiving an account-based pension income stream (such as a reversionary pension), this pension may be tax-free or taxed at a concessional rate, depending on your age and the age of the deceased. 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:
- Tax-free component (the sum of the value of your after-tax contributions and your crystallised segment, such as concessional contributions, made after 30 June 2007)
- Taxable component (the total value of your super interest less the value of the tax-free component). The taxable component of a super benefit may consist of a taxed and/or an untaxed element.
- Taxed element – includes amounts where a fund has paid 15% tax on the contributions or earnings
- Untaxed element – includes amounts where a fund has not paid any tax on the contributions or earnings
From there you can work out the tax rates that apply if you are a dependent of the deceased and are receiving an account-based income stream (such as a reversionary pension):
|Age of beneficiary and deceased (at the time of death||Type of super||Effective tax rate (including Medicare levy)|
|Beneficiary is more than 60 years old or the deceased was 60 years old or older||Tax-free component||Tax-free (non-assessable, non-exempt income)|
|Beneficiary is 60 years old or older or the deceased was 60 years old or older||Taxable component – taxed element||Tax-free (non-assessable, non-exempt income)|
|Beneficiary is more than 60 years old or the deceased was 60 years old or older||Taxable component – untaxed element||Your marginal tax rate less 10% tax offset|
|Both beneficiary and deceased are under 60 years old||Tax-free component||Tax-free (non-assessable, non-exempt income)|
|Both beneficiary and deceased are under 60 years old||Taxable component – taxed element||Your marginal tax rate less 15% tax offset|
|Both beneficiary and deceased are under 60 years old||Taxable component – untaxed element||Your marginal tax rate|
What are the drawbacks of a reversionary pension?
A reversionary pension can have some of the following drawbacks:
- Limited beneficiaries. A reversionary pension can have only one reversionary beneficiary. So, if you want to split the proceeds, you may want to consider multiple pensions, such as having one that will revert to your spouse and one that will revert to a disabled child or that is covered by a BDBN. Alternatively, with a BDBN you can split your death benefit among numerous beneficiaries. Your SMSF Administrator or your Super adviser can provide any number of pension agreements to cover your objectives with some planning.
- Limited beneficiary choices. There are limitations to who can be a reversionary beneficiary (as explained above).
- Tax implications. The value of a reversionary pension will count towards a reversionary beneficiary’s transfer balance cap – the limit which restricts how much money a person can have in tax-free pensions — based on the value of the pension at the date of death. So, if they have already used much of their own $1.6m transfer balance cap then they may not be able to receive the reversionary pension without first commuting (withdrawing) some of their own pension to an accumulation account (earnings taxed at up to 15% maximum) or as a lump sum to their personal name (earnings taxed at your marginal tax rate).
- Less flexibility with estate management. Under a reversionary pension there is generally less flexibility for the trustee(s) and executors to manage superannuation as part of a person’s overall estate, which could make it challenging to distribute a person’s overall wealth evenly (if this is what’s preferred) among their beneficiaries.
Final considerations and reflections
There are potential benefits and drawbacks of reversionary pensions, depending on your circumstances. Because of this, it may be a good idea to speak with a legal professional or an adviser from your superannuation fund to determine what strategy may suit you. It is also worth checking whether a reversionary pension beneficiary or BDBN may take precedence with your fund.
I personally like the certainty provided by reversionary pensions for most clients. But, in some instances, they may limit opportunities and flexibility for tax planning and broader estate strategies.
Cover image source: Atstock Productions (Shutterstock)