The question of whether to make a pension reversionary was easy to answer a few years ago as there were substantial tax advantages to such an arrangement.
Before 1 July 2012, upon the death of a member with a non-reversionary pension, the income and capital gains on the assets supporting the pension would become taxable. This was in contrast with a reversionary pension, where upon the death of the member, as the pension continued to be paid to the revisionary beneficiary, the income and capital gains of the pension assets continued to be nil.
From 1 July 2012, the legislation was amended to broadly allow the tax exempt status on pension assets to continue on the death of a member’s with a non-revisionary pension as long as death benefits are paid out as soon as practicable.
As the main driving force behind having a reversionary pension was to ensure the pension tax advantages were not lost on death, now it is not essential to have a pension be reversionary. However there are other reasons why a member may choose for their pension to be reversionary.
Advantages for reversionary pensions
Common reasons why a member may choose to set up their pensions as reversionary now include:
Administrative ease: There is less paperwork and decisions to be made on the death of a member if there is already an elected reversionary set to be paid. For the simple SMSF with two spouses as members, it is common for pensions to be made reversionary to each other.
Insurance proceeds and taxation: this is only relevant where the pension member has a life policy and insurance proceeds are received on death. There are potential tax advantages available where there is a reversionary pension paid because insurance proceeds are added to the pension account in the income stream component proportions (effectively boosting any existing tax free component). Where insurance proceeds are received for a non-reversionary pension, these advantages may be lost.
Can I make my pension reversionary to anyone?
It is also important to consider that a pension is only able to be reversionary to someone who satisfies a specific definition of dependent. This includes
- a spouse (includes legal or de facto, same sex partners)
- Children; where the child
is less than 18 years of age; or
is between 18 and 25 years of age and financially dependent on the member; or
has a permanent disability.
- Any person financially dependent on the member at the time of death, or
- Any person who is in an interdependency relationship with the member at the time of death.
How do I elect a reversionary for my pension?
You can nominate a reversionary beneficiary when you commence your income stream. This nomination should be reflected in the documentation establishing the pension (often termed the pension minutes, or pension terms and conditions). We can assist you with the establishment of a reversionary pension to ensure all requirements are met.
Can I change the reversionary details of my pension after it’s started?
There is some debate in the industry on whether you can change the reversionary status of a pension after commencement. While it does appear if documented correctly that the reversionary details can be amended after commencement, we do recommend that a member simply stop their pension and start a new one with the new reversionary details correctly documented. If a member has multiple interests in their SMSFs (for example an accumulation account and/or numerous income streams) then certain steps must be taken for an effective pension stop/start strategy.
What if I have multiple dependents?
Where your situation is more complicated than the simple two spouse SMSF, there are other estate planning options that you might need to consider. This may include the need to contemplate a binding death benefit nomination. As with most aspects of the superannuation system, creating a death benefit nomination for your superannuation benefits has complications that need to be considered, and requirements that need to be followed to ensure validity. If you would like more information on these nominations or reversionary pensions please contact the expert team at Aquila Super.