News & Information
What are the differences between reversionary and non-reversionary superannuation pensions?
Superannuation rules allow a member of a Superannuation fund to commence a pension once they meet a condition of release including reaching pension age or suffer a total disability.
There are different types of pension and these Pension arrangements can have limitations depending upon how may (If any) hours that the member is working in gainful employment.
We note that a member of a Superannuation arrangement can commence a Transition to Retirement pension income stream. This type of pension also has limits on accessing lump sums and the maximum and minimum amounts of pension that can be drawn.
However, where a member qualifies for one of the following events, a pension may commence with very few limitations. The member;
- has been permanently disabled
- retired permanently after reaching their preservation age or
- is over the age of 65
- a reversionary pension is where a member who has commenced a pension can nominate a dependant (the reversionary pensioner) to receive a pension on the pensioner’s death. In some cases, it may be possible for the reversionary pension to be converted to a lump sum. The major benefit to the member making the nomination is it reduces the likelihood of a challenge been mounted on the death of the original pension member.
- a non-reversionary pension does not provide for an ongoing pension on the death of the original pension recipient. The balance of the remaining pension after the original pensioner’s death may then be distributed either via the members will or a Binding Death Nomination to beneficiaries at the time of death. The amount paid to beneficiaries can be paid as a lump sum or the beneficiaries may choose to commence a new pension (Subject to contribution rules if the new pension is in Superannuation) in their own right.
Either type has its advantages and is dependant upon family and individual circumstances;
- a reversionary pension gives the member making the nomination certainty around where the pension will be paid to and has some potentially significant tax advantages. Continuity of income is also an important point to note.
- a non-reversionary pension could suit someone who is either hoping to or is receiving Centrelink benefits (Unlike the reversionary pension). Equally, the beneficiary of a non-reversionary pension may be able to add the benefit to their own accumulation Superannuation funds which in turn will be paid as per their directions on death=
Depending upon the rules of the fund that you are a member of, some funds will allow for the option of commencing a reversionary pension.
A reversionary pension only comes into being on the death of a member in pension phase in Superannuation. The reversionary pension will automatically commence paying an income stream to the nominated dependant/s. This pension income stream can be paid;
- at the same rate as was being paid to the deceased member,
- a portion of the original pension (66% or 2/3rds as an example)
- or in some cases, it can be converted to a lump sum depending upon the rules of the fund
For the purposes of paying a reversionary pension, the person who will receive that benefit must meet the definition of “dependant” under the Superannuation rules and they must also be a dependant of the member at the time of the members death. A dependant is;
- the surviving spouse of the deceased member,
- their children,
- a person with an interdependency relationship or
- a person who was financial dependant on the deceased member at the time of the members death
We note the following:
- It is only possible to pay a pension to a child under the age of 18
- A child between the ages of 18 and 25 if they are financially dependant
- Any child who has a disability as defined
- In the case of children who are over the age of 25, then that pension must be paid as a lump sum
When the beneficiary commences the reversionary pension, it is completely up to them as to what will happen with the benefit on their own death. Again, depending on the fund rules, the beneficiary of a reversionary pension may in turn nominate a reversionary pension beneficiary of their own,
The advantages of reversionary pensions
The main advantage of a reversionary pension is the likelihood of a challenge can be significantly reduced compared to pensions that do not have reversionary pension nominations.
The beneficiary of a reversionary pension receives the pension automatically on the original members passing and the amount that commences the pension is not subject to any binding death benefit nominations the member may have on other benefits they are entitled to in the fund.
Whilst Superannuation nominations can provide a reasonable degree of comfort in relation to the wishes of the member, these nominations can be challenged by people who may feel that they have entitlement but that were not noted in the nominations. People who could mount a challenge include an ex-spouse or a child that is estranged.
Finally, the taxation benefits of making a valid reversionary pension nomination can be significant. The benefit to the nominated reversionary pensioner does not need to pass back in to accumulation phase. This is particularly important where a beneficiary is over the age of 65 and is no longer working and in consequence, cannot make contributions to a Superannuation arrangement because they do not meet the work test. Equally, the break down between taxable and non-taxable benefits avoids being recalculated.
The following is a case study prepared by the SMSF Association and can be viewed by clicking here
Take the example of Mark (75) was receiving an account based pension with a 100% tax-free proportion pension ($500k) with no reversion. At the time of his death Mark also had an accumulation balance in the fund valued at $500k. Mark has nominated his surviving spouse Tina and his adult daughter Mandy to receive his death benefit as a lump sum. They will each receive $500,000 which consists of 50% taxable component and 50% as a tax free component. As death benefits to a surviving spouse are fully tax free in this case, Tina will not be taxed on the amount she receives. However, as Mandy is a non-dependant for tax purposes 50% of her benefit will be taxable.
A better way may have been for Mark to commence a reversionary pension nominating his adult daughter, Mandy, as a reversionary and his surviving spouse, Tina, to receive the amount in accumulation phase. As the amount from the reversionary pension consists wholly of a tax free amount no tax will be paid by Mandy. Tina will not be taxed on the amount she receives as any death benefits paid to a surviving spouse are always tax free.
It is also possible to add insurance proceeds to a reversionary pension or add amounts from fund reserves without the requirement to recalculate the taxable and tax free components of the pension balance. This has advantages where the pension is taxable as well as some estate planning advantages.
The income on investments in the fund supporting a pension is tax free while it is in pension phase. This applies to reversionary and non-reversionary pensions. On the death of a pensioner, as any reversionary pension is a continuation of the original pension payable to the deceased it remains in pension phase and therefore the income on investments supporting the pension in the fund remain tax free. However, once a non-reversionary pension ceases there are some issues with the tax exemption on the income received from investments supporting the pension. Recent amendments to the law for non-reversionary pensions provide similar taxation concessions as reversionary pensions after the death of the pensioner and retain certain tax exemptions on the income supporting the deceased pensioner’s account balance until a lump sum is paid to dependants and/or a subsequent pension are commenced by a dependant beneficiary.
There is no requirement to adjust the minimum amount of the reversionary pension to the reversionary in the year of death regardless of any differences that would apply to the minimum factors that may apply to the primary pensioner and reversionary beneficiary. From 1 July the following year, the minimum pension is adjusted based on the reversionary beneficiary’s minimum pension factor.
Everyone would agree that the less paperwork to deal with on the death of the pensioner the better. Therefore the preparation of paperwork or payment of a death benefits pension is one of the more difficult tasks to work through with the surviving trustee(s). Where a pension is reversionary it automatically reverts to a beneficiary. All that may be required is a set of trustee minutes noting the member’s death and reversion to the beneficiary are all that is required. Where there is no reversion, the paperwork may need to include lump sum death benefits, or the creation of a new pension, along with potential actuarial involvement for year-end where the fund is not 100% tax exempt for the financial year.
Once a person has commenced receiving a reversionary pension on the death of the original pensioner it is important to understand that the reversionary pensioner does have the ability to roll-back the income stream at any stage back to accumulation within the fund should they wish to do so. It may be possible to convert the reversionary pension to a lump sum, however, this would depend on the rules of the superannuation fund.
There may be some disadvantages with Centrelink benefits and reversionary pensions when calculating the amount of the pension that is subject to the income test. The amount of pension subject to the income test is reduced by the ‘deductible amount’ which is calculated, in the case of a reversionary pension, on the basis of the joint life expectancy of the pensioner and their spouse. The effect is that in the most cases the deductible amount can be lower compared to non-reversionary pensions. This means a greater amount may be included for purposes of the income test.
By definition, the non-reversionary pension means that no further pension is payable on the members passing. This is because there is no facility for an automatic continuation of the pension payment to a nominated reversionary pensioner.
Under the rules of the fund, the remaining asset within the pension arrangement becomes available for distribution to dependants as per the rules of the fund.
Of course, a binding death nomination can direct the trustees of the fund to pay benefits to particular beneficiaries depending upon the rules of the fund.