Nonreversionary death benefit pension

What is a nonreversionary pension? What happens to a reversionary pension? Can I cash a death benefit?

A non-reversionary pension is an income stream paid to a superannuation member that ceases upon the member’s death. Upon the member’s death, their benefits will need to be paid out of their super either as a lump sum or income stream. Under the super laws, the deceased’s superannuation can’t remain in their super account and must be paid out as soon as practicable.

With a reversionary pension, upon the member’s death, the pension will continue to be paid to a nominated reversionary. The balance of the remaining pension after the original pensioner’s death may then be distributed either via the members will or a Binding Death Nomination to beneficiaries at the time of death. This ability applies regardless of whether the death benefit is being paid from an accumulation account, a non-reversionary pension or a reversionary pension.

Death benefits can only be paid as a pension to a death benefit dependant, including a spouse, a financial dependant, someone in an interdependency relationship or a child of the deceased. The vast majority of SMSF deeds provide that if upon death there is no binding death benefit nomination (‘BDBN’), then the trustee has a discretion regarding to whom (eg, to spouse) and how (eg, as a pension) any death benefit is paid. Included in the non-reversionary pension category is where members have in place a binding death benefit nomination but no reversionary beneficiary nominated on their existing pensions. A binding death benefit nomination on its own does not make a pension reversionary.

When someone dies and leaves behind a reversionary pension for their spouse, the value of that pension for the purpose of the $1. Where a death benefit pension is pai the value reported in the dependant’s TBA is the value of the pension at the date that the pension commences. If there is a delay between the death of the member, and the date the pension commences, the value recorded as a credit in the dependant’s TBA is the value of the deceased’s pension account plus any accumulated earnings. In effect, the pension continues to be paid and ‘reverts’ to your beneficiary, so it becomes a reversionary pension. Provided your intended beneficiary is an eligible death benefit dependant at the time of your death , they will begin receiving your pension immediately after your death.

Cashing a death benefit in the form of a reversionary pension only satisfies the compulsory cashing requirements as long as the interest continues to be cashed in that form. If a lump sum death benefit is payable, assets may need to be sold to make a cash payment. The reversionary beneficiary will need to be nominated on existing pensions.

If the reversionary beneficiary dies prior to the original pension owner passing away, the pension will automatically become a non - reversionary pension. Given that the pension will now be non - reversionary , you should consider providing the trustee of the super fund with a death benefit nomination. The ATO have published ‘ Death benefit income streams – meeting minimum pension payment requirements ’ which provides guidance on cashing a death benefit and preventing contraventions when minimum pension standards are not met. SISR prescribes the form in which the deceased members benefits must be cashed. This means that where a pensioner passes away with no reversionary income stream, the value of any life insurance payout would be included in the commencement value of a resulting death benefit income stream.

The death benefit recipient would have a credit applied against their TBC equal to the balance of the death benefit pension at date it commenced inclusive of the insurance proceeds. Non - reversionary death benefit pensions count towards the TBC of the recipient immediately after they use the benefits to commence a death benefit pension. When a reversionary death benefit pension is receive it does not count towards the TBC for twelve months. This provides the death benefit recipient time to work out how they want to receive the death benefit and move some of their own pension account back to accumulation phase if necessary. A spouse is considered a tax dependent and would receive the benefits tax-free.

So in your case, on your death , the Trustee is compelled to pay your Superannuation benefit to your wife and the proceeds would be tax-free. You have elected to have your wife as a Reversionary Pensioner for your Allocated Pension (Account-Based Pension ). The starting balance of a non-reversionary death benefit pension counts towards the TBC of the recipient as soon as the death benefit pension commences. On the other han when a reversionary death benefit pension is receive the balance of the pension at the time of death will be a credit to the beneficiary’s TBA, months after the death of the original pension account holder.

No legal support is given in relation to this statement. Your death benefit nomination is only in respect of accumulation accounts and any non - reversionary pension (s). If you have made a BDBN which includes and is counter to a reversionary pension , generally the pension will prevail, but it can depend on the governing rules of your fund.

However, a tax advantage of a reversionary pension over non - reversionary death benefits remains, as any life insurance proceeds added to a reversionary pension will retain the tax components of the pension , rather than be simply added to the taxable component. Recipients of non-reversionary pensions in most Australian superannuation funds are able to determine what happens to their pension account balances when they die. They can prepare a binding death benefit nomination (“BDBN”) or can ensure that a particular person, eg a domestic partner, will have control of their SMSF. However, when the reversionary beneficiary turns 6 the pension payments from the reversionary death benefit income stream are tax free. Lastly, investment income and capital gains from the assets supporting the reversionary death benefit income stream are exempt from tax, noting that your reversionary beneficiary can only retain retirement phase income streams up to their transfer balance.

Daniel Butler and Nathan Papson note that changing an existing non-reversionary defined benefit pension to be reversionary may give rise to certain issues.