What Is A Reversionary Pension?

When making a death benefit nomination in super most people know you can leave your super to your estate or to a nominated beneficiary. Often this is your spouse or your children. This is called a death benefit nomination and can be binding or non-binding, and lapsing or non-lapsing.

When this nomination in invoked – the money must leave the superannuation environment and be received personally. I.e. You loose all the tax advantages that superannuation has to offer.

There is another nomination which you are allowed to make with your superannuation, and that is a reversionary nomination. If your superannuation is not in retail/industry superannuation, but rather in a Self Managed Superannuation Fund, you need to make sure the Trust Deed allows for reversionary pensions (note that superannuation has two phases the accumulation phase and the pension phase – when we refer to pension we are referring to the pension phase of superannuation not the government paid age pension).

When you make a reversionary nomination the money can stay in superannuation and does not have to be withdrawn. This means you can keep the money in superannuation and keep receiving the pension. Effectively you nominate someone to continue receiving your pension.

There are some important caveats here, only someone who is considered a dependent under the Superannuation Industry (Supervision) Act 1993, should be nominated. The reason for this is not everyone is entitled to receive a reversionary pension.

The rules around transfer balance cap and total superannuation balance still apply. I.e. You don’t get the benefit of two caps, and must still fit under an individual cap.

One of the benefits of the reversionary pension is that you have 12 months before the rules apply. This gives you 12 months to organise your superannuation.

The most common example of a reversionary pension is when a couple retires together and nominates each other. In this way the remaining partner can continue to receive the pension until they also pass away.

As an example, let’s look at a couple in their late 60’s. Assume they both have pensions, and each has a balance of $500,000.

Without a reversionary pension the remaining spouse would have to receive the $500,000 superannuation as a payout and then invest outside of superannuation. Any income or gains would then be taxable. Assume they received a 10% return during the year, the estimated tax would be circa $6,177, assuming there was no other income received. By having a reversionary pension in place this tax could be avoided and the funds would remain tax free.

Let’s look at another example where the balances are higher. Let’s say the same couple has a balance of $1.6million each. They have used all their allowable transfer balance cap. In this instance the problem with the reversionary nomination is that the remaining partner would then breach the transfer balance cap.

As you have twelve months to resolve this (see above), there is time to restructure your affairs. The remaining spouse can roll their superannuation back to an accumulation account. This will mean they are no longer breaching their transfer balance cap. The funds can remain in an accumulation account. The status of this account is not as advantageous as the pension phase, but it does cap the taxation at 15%.

Portfolio design would then be important in this portfolio. The portfolio in the accumulation phase should hold cash and franked divided stocks to make the effective tax rate lower. The other portfolio in the pension phase could then be more growth orientated noting that there is no capital gains tax payable on the sale of assets in the pension phase.

Note in this example the $3m total superannuation balance would be breached, and it may be optimal $200,000 when the rules go into force.

Another example of where this might be needed is if you own a property in a Self Managed Superannuation Fund. If this property is the main asset of the fund, then there will not be sufficient cash to payout a death benefit nomination with selling the property. By using a reversionary nomination the property can be maintained.

In summary reversionary pension can be an effective way to make a nomination in your fund. There are significant tax and peace of mind benefits.

This consideration should be done in conjunction with your estate planning to make sure there is no conflict with your great estate planning wishes.

*Please note that this is not investment advice and does not take into account your personal circumstances. You should not make and decisions without first receiving accounting or financial advice for your personal situation. This article does not constitute personal advice and the content may be updated by future legislation.