One critical decision you’ll have to make when starting an account-based pension is what should happen to your retirement payments should you die before they’re exhausted.
Superannuation benefits allow you the following options:
- Binding death benefit nomination. This option guarantees that your nominee will receive your superannuation funds without any trustee’s interference.
- Nominated beneficiary. This is where you guide the trustee on whom to pay your superannuation.
- The reversionary beneficiary. This is where your superannuation passes to your nominee.
Before we can understand what a reversionary pension is, let’s look at what it’s not.
A reversionary pension isn’t a distinct or separate form of pension. Thus, any pension type covered by the 1993 Superannuation Industry Supervision (SIS) Act can be reversionary.
It’s also not reversible as its name may suggest.
A reversionary pension gets its name and meaning based on what happens to it following the death of a pensioner. It doesn’t halt after the pensioner’s death.
Reversionary Pension Explained
A reversionary pension is a retirement benefits payment scheme that automatically passes to your next of kin upon death. The beneficiary receives similar payments under the same conditions as the original pension plan.
Therefore, your beneficiary will also enjoy 100% tax-free payments if the pension account is untaxed.
Since a reversionary pension is a continuation, the beneficiary can only get it if you were already receiving payments at the time of your death.
The pensioner also has to nominate their beneficiary before their death.
Who Can You Nominate?
Sections 2A and 2B of the SIS Act elaborate on the people who you can nominate as beneficiaries for reversionary pension. The table below explains eligible nominees:
| Beneficiary | Characteristics |
| Pensioner’s child |
|
| Spouse |
|
| Dependent person |
|
In situations where the dependent is your child aged between 18 and 25, the trustee will continue forwarding your pension payments until they attain 25 unless they exhaust the account. Once they turn 25 and the reversionary account still has funds, they will receive the balance in a lump sum.
Disabled children are excluded from this law because they continue to receive pension payments until they exhaust the account balance, even when they’re over 25.
Note: A nominee for the reversionary pension must be an eligible dependent at the time of the beneficiary’s death. If you don’t nominate a beneficiary before death, the trustee will use their discretion to appoint the recipient of your benefits.
Once you select your beneficiary, they will receive the entire amount. You can’t divide your pension between your beneficiary and any other dependents.
How it Differs From A Non-Reversionary Pension
A reversionary pension differs from a non-reversionary model because the latter stops upon the pensioner’s death. If assets are involved, the trustee will have to sell these and pay the beneficiary a lump sum.
Unlike the reversionary plan that automatically shifts to the nominated beneficiary, the non-reversionary pension is:
- Paid in a lump sum to the beneficiary upon the nominee’s death
- Forwarded to a new pension plan preferred by the beneficiary
If the beneficiary desires a new pension plan, they’ll not enjoy the benefits of the original plan. Consequently, the pension scheme will calculate new taxable and tax-free components.
Pros and Cons of a Reversionary Pension
The primary reason the reversionary pension plan could be appropriate for you lies in its benefits. These include:
- Favourable taxation terms
- Security of your estate
- Retention of your assets
- Peace of mind during the grieving
Benefits of the Reversionary Pension Plan
The benefits of a reversionary pension plan include:
- Favourable taxation conditions. As we’d discussed earlier, if you had a tax-free pension payment, your beneficiary will also get the same. The scheme will not recalculate the pension proceeds even if it has taxable components. But a non-reversionary pension attracts new taxes, specifically if the beneficiary hasn’t attained the retirement age. The new taxation lowers the pension amount received by the beneficiary.
- Estate security. Inheritance disagreements are messy, especially since a will doesn’t cover who will take over self-managed super funds (SMSF). Without a clear beneficiary, your dependent may not always agree with the trustee’s choice.
Disagreements over the right person to receive the money could trigger costly and time-wasting court cases. You don’t have to worry about the security of your pension when you subscribe to a reversionary pension plan. This model establishes the beneficiary entitled to your pension, thereby discouraging disagreements.
- Asset retention. Since there isn’t any pressure to make lump sum payments, any SMSF-controlled assets will be retained. This advantage is crucial in families that have held certain assets for generations and would still like to hold onto them.
Losing a loved one is difficult, especially if compounded with worries about the security of your wealth and superannuation.
Whereas the will helps you determine what will happen to your wealth, a reversionary pension plan lets you control who will benefit from your superannuation. Thus, your loved ones would have to concern themselves with your death benefits as they struggle with the pain of your departure.
Its Drawback
The primary disadvantage of the revisionary plan is that you can’t change the beneficiary. Although the 2013 ATO resolution stated that one could change their non-reversionary pension to a reversionary one, the pension plan can’t be altered after the pensioner’s death.
Changing to a revisionary model depends on:
- Whether the SMSF title deed allows it
- ATO’s approval
- Pension plan terms and conditions
Where to Start
Making binding choices concerning wealth and superannuation involves tough decisions and strict legal conditions.
Decision-making errors concerning your pension plan are costly but avoidable.
Call WiserNow today, and we’ll guide you throughout the decision-making process and help you make an informed choice concerning your retirement benefits.
Frequently Asked Questions
What makes the reversionary pension unique?
The reversionary pension is unique because it continues under the same conditions even after the pensioner’s death. The only factor that changes after the pensioner’s death is the recipient, who now becomes their nominee.
Is the reversionary pension a type of pension?
No. You can transform any pension plan into a reversionary scheme.
The Government Age Pension and superannuation are Australia’s primary forms of pension. Each can be reversionary if the pensioner nominates a nominee and approaches ATO for approval.
