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When you retire, there are lots of decisions to make about whether to take a lump sum or start an account-based pension.
You also need to decide how you would like the remaining balance of your super account to be distributed when you die. Normally, that means making a death benefit nomination.
Many super funds also give you another option to think about if you decide to start a super pension – the chance to nominate a reversionary beneficiary to automatically continue receiving your super pension after your death.
What is a reversionary pension?
Generally, if you are receiving a superannuation income stream or pension, it ceases as soon as you die.
Some super funds however, allow you to nominate a reversionary beneficiary who automatically becomes entitled to receive your super pension after you die. In effect, the pension continues to be paid and ‘reverts’ to your beneficiary, so it becomes a reversionary pension.
Provided your intended beneficiary is an eligible death benefit dependant at the time of your death, they will begin receiving your pension immediately after your death.
Who are my death benefit beneficiaries?
For a reversionary pension nomination to be valid, only someone classed as your death benefit dependant under superannuation law can be nominated as your reversionary beneficiary.
This means at the date of your death your reversionary beneficiary must be:
- your spouse (including same sex)
- your child under age 18
- your child who is permanently disabled
- your child aged under 25 who is financially dependent on you immediately before your death
- someone with whom you are in an interdependency relationship.
Under super law, you are considered to be in an interdependency relationship if you and the other person live together, have a close personal relationship, and one or both of you provide for the financial and domestic support and personal care of the other. For more on dependants under super law, see the ATO website here.
Pros and cons of a reversionary pension
- Payment certainty – Nominating a reversionary pensioner gives you a level of certainty that the person you want to receive your super benefit will get it when you die, as it’s not up to the super fund’s trustee to decide on the beneficiary. Your beneficiary also receives immediate access to the cash flow from your pension, which can be helpful at a difficult time.
- Tax advantages – Generally, a super pension is tax-free or concessionally taxed (depending on your age and the age of your beneficiary), so there can be tax advantages for your reversionary beneficiary.
- Assets remain in the super system – With a reversionary pension, the assets supporting the pension payments remain within the beneficial tax environment of the super system. If the death benefit is paid as a lump sum, some beneficiaries are unable to recontribute the money back into the super system.
- Tax components preserved – When a reversionary pension reverts to the reversionary beneficiary, the taxable and tax-free components calculated when the pension first commenced are preserved.
- Nomination must be at commencement – Generally, you can only make a reversionary nomination when you start a super pension. Once a super pension has commenced, you may need to stop (commute) and restart it if you want to nominate a reversionary beneficiary.
- No lump sum – Reversionary pensions do not provide a lump sum if the reversionary beneficiary needs to pay off debts. A reversionary pension can usually be commuted into a lump sum if required.
- Changed circumstances – Reversionary pensions create problems if you divorce or separate from your intended reversionary beneficiary. In this situation you need to commute the pension and commence a new pension with a different nominated beneficiary.
- Invalid nomination – If your nominated reversionary beneficiary is not a death benefit dependant at the time of your death, or if they have died, your nomination will be invalid, and the fund trustee will use its discretion when paying out the balance of your super pension account.