SMSF Technical Education & Strategies

 

Should you establish your pension as a 'reversionary pension' ?

by Meg Heffron BEc, FIAA

Heffron

 

Prior to July 2007, we almost always recommended that when one member of a couple started a pension, it should automatically revert to the other on death.

Our view was largely driven by the tax regime at that time. Nominating a reversionary ensured that the pension would only be tested once against the original pensioner’s Reasonable Benefit Limit (RBL). In particular, this avoided a second assessment (against the reversioner’s RBL).

 

The changed tax regime from July 2007 means these tax drivers are now irrelevant, leaving advisors and their clients free to focus on other issues such as flexibility and control.

 

These days, we generally recommend that pensions are not reversionary for a range of reasons:

 

• Doing so preserves the ability to pay a benefit to the deceased’s estate if that is desirable;

 

• More generally, it preserves flexibility within the family group so that the benefit can be paid in the best way possible at the time. The best outcome for the family, for example, might be to have some of the benefit paid to the estate (possibly to testamentary trusts) and some to specific beneficiaries including (say) the surviving spouse as a pension;

 

• It does not preclude (say) the surviving spouse from choosing to take the benefit as a pension (and the tax treatment of this pension is the same as if it had been a reversionary pension).

 

There are two common criticisms of this approach:

 

• It removes one means of ensuring that the death benefit is paid to the beneficiary intended by the deceased.

 

This is true – and where the family circumstances are complex, likely to result in disputes or where certainty of outcome is absolutely critical, a reversionary pension or binding death benefit nomination (discussed below) may be required. However, it is important to note that substantial control of death benefits can also be achieved by managing who controls the trustee (and therefore the fund) after death rather than by specifically dictating who is to receive the benefit by nominating a reversionary beneficiary. Under this scenario, the deceased would not dictate the outcome (who received the benefit and how) but would (in advance) dictate who would be making those decisions (by ensuring that control of the fund passed to the “right” person(s)).

 

• the (fund’s) exemption from tax on income earned by assets underpinning the pension ceases on the pensioner’s death.

 

This is also true, but note that it starts again as soon as the beneficiary has elected to start a new pension (if applicable).

 

It is also worth noting that if the tax exemption restarts relatively soon after death, very little of the fund’s investment income will be taxable (quite possibly only interest, dividends, rent and capital gains actually received / realised during the period between death and the commencement of the pension).

So when might it be appropriate to revert?

In our view, this would typically be when the original pensioner wants to make certain that ownership of the pension assets passes to the reversioner.

 

Some examples to illustrate:

 

• the reversionary pensioner will not be in a position to control the trustee, for example because there are other fund members, and there is a risk that decisions made by the trustee will not be in accordance with the original pensioner’s wishes.

 

• the original pensioner is concerned about the reversioner’s ability to deal with the residual pension assets. For example this could be because of advancing age, mental incapacity, or because of spendthrift tendencies.

 

• to ensure pension assets don’t flow to the deceased’s estate, and so protect them from challenges to, or creditors of, the estate.

 

 

Disclaimer 

 

While Heffron believes that the information contained herein is reliable, no warranty is given to the accuracy and persons who rely on it do so at their own risk. This information is intended to provide background information only and does not purport to make any recommendation upon which you may reasonably rely without taking specific advice. In particular, it should not be considered financial product advice for the purposes of the Corporations Act. If you would like more information on this article or any other SMSF information provided by Heffron, please contact them on 1300 172 247 or by e-mail heffron@heffron.com.au

 

About Heffron

 

Heffron is a leading SMSF specialist firm, providing a full range of SMSF services to accountants, financial advisers, and individuals. This includes trust deeds, fund administration, actuarial, audit, and technical support and training. Heffron also run a 3-day intensive course for advisers looking to enhance their SMSF advisery skills. Their principal, Meg Heffron, was appointed as the SMSF industry panel member of the Government's Super System review (also known as the Cooper review), chaired by Jeremy Cooper.