Estate planning is important to ensure your assets go to those you want after passing away. Including your pension from your super fund. Setting up a reversionary pension is one way to be clear about who you want to receive your remaining super money.
What is a reversionary pension?
A reversionary pension allows you to nominate a reversionary beneficiary to receive your superannuation as an income stream after you pass away. This type of pension tells the trustee of your super fund what you want to happen with the remaining funds in your super. The reversionary pension continues to operate under your pension's original terms and conditions. However, it can only continue to your reversionary beneficiary if you’ve started to receive your pension before you die.
Who can be a reversionary beneficiary?
A reversionary beneficiary is someone you nominate to benefit from your remaining super money as an income stream. The following people are eligible for you to select as your reversionary beneficiary:
- Your spouse at the time of death
- A child under the age of 19
- A child aged between 18-25 as a financial dependant
- A child at any age who has a disability
- A person in an interdependency relationship with you
If you don’t have an eligible beneficiary, you may need to use a binding death benefit nomination. Unlike a reversionary pension, a binding death benefit nomination means that your super benefit becomes an asset distributed as part of your Will after you pass away. If you don't have a Will, the court uses intestacy rules to distribute your super.
How can you nominate a reversionary beneficiary?
Before you choose a reversionary beneficiary, it’s important to consider who will benefit from the additional income stream after your death from the list of people you can nominate. Depending on the type of super fund you have, some will allow you to nominate someone when you open the fund, and others will only allow you to nominate someone when the pension comes into effect. If you have a self-managed super fund, it’s important to check whether a reversionary pension has priority over a BDBN.
Can you change or cancel a reversionary beneficiary?
Typically, most super funds will allow you to cancel or change your reversionary beneficiary if your circumstances or relationships change. However, not all self-managed super funds allow you to cancel or change your nomination. Instead, you may need to withdraw the lump sum of your pension from the current fund and start a new pension with a new reversionary beneficiary.
What are the benefits of a reversionary pension?
Here are three benefits to having a reversionary pension:
- More certainty. Unlike a binding death benefit nomination, there is typically more certainty that your reversionary beneficiary will receive the pension after you pass away.
- More security for the beneficiary. The beneficiary doesn’t risk not being able to recontribute the lump sum back to their pension or any cap restrictions.
- Seamless transfer. The reversionary pension automatically transfers to the beneficiary and does not form part of the estate. The decision is rarely challenged since it happens when the deceased has full mental capacity.
What are the cons of a reversionary pension?
Here are three drawbacks of having a reversionary pension:
- Only one beneficiary. With a reversionary pension, you can only nominate one reversionary beneficiary. Therefore, if you want to split the fund, you need to set up multiple pensions. Plus, there are limitations to who is eligible to nominate as your reversionary beneficiary.
- Tax implications. The sum of a reversionary pension does count towards a reversionary beneficiary’s transfer balance cap. Therefore, if the beneficiary is already nearing the cap, they may need to withdraw their pension and pay tax on the sum.
- The executor can’t distribute the sum evenly. The reversionary pension makes it difficult for executors to distribute the superannuation lump sum evenly across all estate beneficiaries.
There are pros and cons to setting up a reversionary pension. Therefore, it’s important to speak with an advisor from your super fund to determine what would suit your circumstances the best and whether a binding death benefit nomination would take priority.
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Disclaimer: The content of this blog is intended to provide a general guide to the subject matter. This blog should not be relied upon as legal, financial, accounting or tax advice.