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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. For more information, see SuperGuide article Who gets your super when you die? A definitive guide to death benefit nominations.
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.
Good to know: Receiving a reversionary pension can have an impact on your Centrelink benefits and the income stream may be assessed under the means testing rules. Contact the Department of Social Services at www.dss.gov.au to find out more.
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.
FYI: As there are restrictions on the payment of super pensions to child beneficiaries aged under 25, some super funds only allow you to nominate your spouse as the beneficiary of a reversionary pension.
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
Reversionary pensions and the Transfer Balance Cap (TBC)
Since the 1 July 2017 reforms to the super system, there is a $1.6 million cap on the amount that a super fund member can transfer and hold tax-free in the retirement or pension phase.
This cap also applies to reversionary pensions, so if a dependant beneficiary becomes entitled to this type of pension, they need to ensure it does not take their pension phase super assets over the $1.6 million cap.
To allow reversionary beneficiaries time to get their super assets in order and avoid breaching their TBC, the value of a reversionary pension is not added to the beneficiary’s transfer balance account until 12 months after the fund member’s death.
This means if you’re the beneficiary of a reversionary pension, you need to be careful that it will not take you over your $1.6 million cap. For some people, this may mean they need to commute the reversionary pension and take it as a lump sum instead.
For more information, see SuperGuide article Definitive guide to the $1.6 million transfer balance cap.