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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.
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