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Ins & Outs of a Reversionary Pension

What is a Reversionary Pension?

A reversionary pensions refers to a type of pension that is designed to revert to a dependant beneficiary after the death of the member who is in receipt of an account based pension or transition to retirement pension.

The pensioner can nominate anyone who is a SIS dependant to be their reversionary pension beneficiary. Under the SIS Act, dependants include:

  • The spouse or defacto (in practice) spouse
  • Any child of the super member including step-child, adopted child or any child of the member born after the member’s death
  • Any person deemed by the Trustee to be partially or entirely financially dependent on the member
  • Any person with an interdependency relationship with the member

The reversionary pension beneficiary must be nominated in the initial pension documentation when the pension is originally commenced.

If the member wants to appoint a reversionary pension beneficiary subsequent to the pension being commenced, this can be done by the SMSF member giving the SMSF trustee a binding notice in writing. Alternatively, the pension commencement documentation may be able to be amended to include a reversionary beneficiary.

What are the benefits?

Firstly, the most important benefit of nominating a reversionary pension beneficiary is that the pension remains inside of the SMSF and is passed onto the nominated beneficiary. The members balance also remains in pension phase, with the applicable tax exemptions associated with a pension inside of a SMSF.

If a reversionary beneficiary has not been nominated the members balance will have to be reverted back into accumulation and have the members balance paid out as a death benefits payment. The problem some funds may have with this situation is that the fund is asset rich, and cash poor, which means they will have to sell some assets before the death benefits can be paid out of the fund. For funds that hold illiquid assets (such as units in an unlisted unit trust), disposing of the assets may be very difficult.

There are also a number of other benefits associated with the establishment of a reversionary pension, which include:

No minimum pro-rata pension required prior to death – Where a pension is set-up with a reversionary beneficiary and the member passes away, there is no minimum pension that must be taken prior to the members passing. There is no requirement to adjust the minimum pension for the year, regardless of any variation in the minimum factors between the primary pensioner and reversionary beneficiary.  From 1 July the following year, the minimum pension will be required to be adjusted based on the reversionary beneficiary’s minimum pension factor.

Less Paperwork – The preparation of paperwork regarding the payment of death benefits is one of the more difficult tasks to work through with the remaining trustee, so in our view the less paperwork to have to deal with the better.  Where an income stream automatically reverts to a beneficiary, a set of trustee minutes noting the member’s death and reversion to the tax dependent beneficiary is all that is required.

Frequently Asked Questions 

Question: What if the reversionary beneficiary dies before the member?
Answer: If the nominated reversionary beneficiary dies before the member, the member will be in the same position as if the nomination had not been established. The member may need to consider amending the pension commencement documents or preparing a binding death benefit nomination (BDBN).

Question: What takes precedence, a reversionary pension or a binding death benefit nomination?
Answer: This essentially comes down to what is stipulated in the trust deed. The SMSF deed will generally state one of the following:

  • Expressly state that one takes precedence over the other;
  • Provide that the one signed later will take precedence over the earlier one; or
  • Be silent as to which takes precedence

If your deed does not stipulate which takes place, a general principal is that the reversionary pension will take precedence regardless of the order of signing the pension document and the BDBN. This is because the reversionary pension will automatically transfer the pension to the reversionary pensioner.

Question: What if the reversionary beneficiary is not a dependant?
Answer: If, at the time of the member’s death, the reversionary beneficiary is not a SIS dependant the trustees must refer to the provisions set out in the trust deed. The deed may request the trustee pay the member’s benefits in accordance with any valid BDBN the member has in place.

If there is no BDBN in place, the benefit payments will generally be paid out at the discretion of the trustees, however, this is subject to any specific rule set out in the trust deed

 

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