Superannuation funds have special rules for the distribution of benefits after the death of a member. In many cases, members will want to pay their death benefits as a lump sum to their spouse or a financially dependent child.
However they can also pay their remaining benefits as a pension rather than a lump sum as long as the fund allows them to nominate a reversionary beneficiary.
This is usually stipulated in a provision of the trust deed which states that upon the death of a member drawing a pension, the payments will continue (i.e. revert) to a nominated beneficiary – typically a spouse.
Nominating a reversionary beneficiary has several advantages.
- First, it is convenient because the original pension simply continues to be paid to the nominated reversionary.
- Second, the trustee is bound by a valid reversionary nomination thereby removing the trustee’s discretion to pay part or all of the benefit to someone else.
- And third, unlike lump sum beneficiary nominations which need to be renewed every three years, reversionary pension nominations do not need to be reviewed unless the original pension is stopped and then restarted.
The main downside is that the taxation of reversionary pensions can sometimes be complex. While lump sum death benefit payments are tax-free if paid to a dependant, reversionary pensions are not always exempt from tax. For example, if the primary beneficiary is under 60 at the time of death, the reversionary beneficiary will be taxed on the taxable portion of the pension at their marginal rate but will be entitled to a 15% tax offset.
Setting up a reversionary pension in a SMSF requires careful drafting so that it is consistent with any binding death benefit nominations that may have been made by the deceased member.
If you require assistance in setting up a reversionary pension, we can refer you to a specialist superannuation lawyer.
Warning: While all care has been taken in the preparation of this document (using sources believed to be reliable and accurate), we do not accept responsibility for any loss suffered by any person arising from reliance on this information. This document is not financial product advice and does not take into account any individual’s objectives, financial situation or needs.