A reversionary pension is an income stream payment setup by an SMSF Trustee that automatically passes pension payments to a single-nominated beneficiary upon death.
Once the SMSF Trustee has nominated an individual based on the above, a Reversionary Pension will be automatically paid to your Reversionary nominee when the Trustee of the SMSF passes. The Reversionary Pension operates and functions like an Account Based Pension, however, the income stream payments are received by the Reversionary nominee.
If you do not have a spouse, children or share an independency relationship with another individual, you will need to consider nominating a legal personal representative. For further guidance on SMSF Estate Planning, please see here.
Prior to establishing a Reversionary Pension, it may be worth discussing who you want to benefit from your pension after your death with your family, legal advisor or financial advisor who oversee your estate planning needs.
The first step to consider is to ensure the SMSF Trust Deed allows for death benefits to be paid and whether a Reversionary Pension nomination has a priority over a Binding-Death-Benefit-Nomination. In some cases, Trust Deeds may allow a BDBN to override a Reversionary Pension nomination. Certain considerations must be taken to ensure this is not the case with your Fund.
You will need to firstly ensure you have commenced a pension and put in place a Reversionary pension nomination. With a Reversionary pension the income stream will automatically continue to your reversionary nominee. Hence, no external decision needs to be made by the Trustees of the SMSF other than confirming the Reversionary pension nomination.
We work with BGL and they offer a Member service where a Reversionary Pension can be added through BGL 360. BGL provide further guidance here.
A Reversionary Pension has the following benefits:
1. Tax benefits for retaining funds in a pension
Upon receiving a Reversionary pension income stream, this pension may be tax-free or taxed at the concessional rate of 15%. This depends on the age of the deceased and the age of the Reversionary Pension nominee. Based on the ATO death benefit ruling, to work out how a Reversionary Pension may be taxed, you will need to refer to your Member Statement for Account Based pension. This will show details for two separate components:
We provide further guidance on taxable and tax-free components here.
2. Estate Security
With a Reversionary pension income stream, there is essentially more certainty that the nominee will receive the Reversionary pension payments.
3. Retain the Funds within the SMSF
When a super pension is paid as death benefit lump sum the receiving beneficiary may be unable to recontribute to their own super based on age. With a Reversionary pension this is not the case as the funds remain in the superannuation system.
4. Extra 12 months to coordinate financial affairs upon death
With a Reversionary pension, a 12-month delay exists before the receipt of a Reversionary pension affects the receiving beneficiary’s own transfer balance report. This gives the receiving nominee extra time to get either own affairs in order and is especially helpful if they are currently in account based pension. 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 a payment is received and the sum of the two member balances may exceed the $1.7 million transfer balance cap (as at 1 July 2021).
Furthermore, a Reversionary Pension has the following drawbacks:
1. Limited Nominations
A Reversionary pension can only have a single-nominated beneficiary.
2. Limited Nomination Options
There are limitations to who can be a nominee for a Reversionary pension.
3. Tax Implications
The value of a Reversionary pension will count towards a beneficiary’s transfer balance cap which is the limit to how much a Member in a Fund can have in tax-free pension.
In certain scenarios and for particular SMSF Trustees, a Reversionary pension is a suitable death-benefit establishment if the Trustees wish to support a nominated individual after passing. As mentioned above, there are certain considerations which need to be taken into account before nominating and establishing a Reversionary pension. For further guidance on SMSF Account Based Pension, please see the button below.