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20 thoughts on “5 key reasons why you must always have a reversionary pension

  1. Aaron, in regard to your comment below, I wa of the understanding that a minimum pro rata pension did not have to be paid in the event of death – ref SIS Reg 1.07(D). Can you comment?

    “This is in contrast to a non-reversionary income stream which must ensure that the pro-rata minimum is required to be drawn up to the date of death.”

  2. Aaron, I too have also been of this view that the minimum pro rata pension is not required in the event of death. Would be interested to hear your views.

    • Hi Gabrielle (and Rebecca to whom I missed the first comment on this topic),

      Thank you for pointing this out. In reading SIS1.07D, I agree that a minimum pro-rata pension is only required to be taken where there is a commutation not as a result of death. SISR 1.07D(1)(a) outlines that a commutation from an income stream can occur as a result of the death of the pensioner or a reversionary pensioner. The pro-rata minimum calculation contained in paragraph (2) only relates to paragraph (1)(d).

      Thank you for highlighting this to me.

      Regards,
      Aaron

  3. Hi Aaron, great blog! What strategy can be taken to replace say and exisitng lump sum death benefit nomination with a reversionary pension nomination, would this require a rollback to accumulation and restart of the pension or is there another way ?

    • Hi Drew,

      Thanks for the feedback. If the original pension did not specify a reversionary beneficiary, then it would require a full commutation and re-purchase of the pension with a nominated reversionary beneficiary. Timing of the commutation may be critical – especially if multiple pensions are running as any rollback to accumulation becomes a single interest.

      Cheers,
      Aaron

  4. Aaron, Where there is no reversionary beneficiary, you say that there must be a full commutation and re-purchase of the pension. How do we do that without involving the payment of a lump sum? If a lump sum death benefit is paid how would the surviving (non-working) dependant recontribute the lump sum into the fund in order to re-start a pension? Surely a brand new trust deed could overcome this problem while both members are still alive?

    • Hi Peter,

      The commutation is simply a rollback to accumulation phase, it doesn’t require a lump sum to be taken.

      The trust deed doesn’t fix the problem as the nomination of any reversionary beneficiary must be stated within the original terms and conditions of the pension, or otherwise via a binding death benefit nomination. Ideally, the two will marry up to ensure there is no ambiguity as to what takes precedence.

      Regards,
      Aaron

  5. Aaron,
    Thanks for the reply but one further question. Are you saying that the problem can be fixed by the member/s executing a BDBN (allowed for in the trust deed) instructing the trustee to pay his pension benefits as a reversionary pension to his dependant, in this case spouse?
    Regards,
    peter falconer

    • Hi Peter,

      Potentially yes… In referring to TR2011/D3 the Commissioner states that where a definitive instruction to pay an income stream to a tax dependant spouse is provided, the pension does not cease. There is some conjecture in the industry as to whether a reversionary pension or a binding death benefit nomination take precedence, therefore it is suggested as best practice to ‘marry’ the two together.

      Regards,
      Aaron

  6. Interesting note raised within Sept 2011 NTLG minutes regarding whether SISR 1.07(D)(1)(a) applies; as TR 2011/D3 suggests that a pension doesn’t cease where a reversionary beneficiary exists. Extract from NTLG Minutes, “Given that the pension does not cease on death (especially in light of TR 2011/D3), it would be argued that regulation 1.07D(1)(a) would not apply (which means that a minimum annual payment is still required). Furthermore, as the existing pension continues in the year of death, only one minimum pension amount would be required for the year of death.”

    http://www.ato.gov.au/taxprofessionals/content.aspx?menuid=0&doc=/content/00298032.htm&page=10&H10

  7. Could you please elaborate on your comment where the member dies and the benfits pass to the surviving spouse that the death beneift would be rolled back into the surviving spouses accumulation account? I have had many conflicting opinions regarding this. A legislative reference would be ideal…

    Thanks,

    Matt

    • Hi Matt,

      It is the benefits of the deceased member that move back from pension phase to accumulation at the time of death (according to ATO’s interpretation in TR 2011/D3). The death benefit is then transferred to the tax dependant beneficiary as an internal rollover. This means that the benefits are then in accumulation for the beneficiary until such as time that they elect to receive an income stream.

      Regards,
      Aaron

  8. Thank you for an excellent & very useful blog.
    In the context of reversionary pensions, I had two quick questions
    1) Can more than one reversionary beneficiary be nominated to a single pension interest and
    2) what happens if the beneficiary is under pension age? Thanks,
    Anuradha

    • Hi Anuradha,

      Thanks for your kind comments about my blog, I’m glad you enjoy it.

      In respect to your questions:

      (1) Yes, you can have more than one reversionary beneficiary nominated as long as they are tax dependants. This could be reversionary based on a specific percentage across beneficiaries or a specific amount.
      (2) Being under pension age is irrelevant to being able to draw an income stream. If they are a tax dependant beneficiary, they can take benefits as a pension or lump sum. The taxation of the pension for the beneficiary will ultimately depend on the deceased member’s age at death and the age of the beneficiary.

      Regards,
      Aaron

  9. This may be a basic question, but it is my understanding that a reversionary pension is a pre-existing pension payable to a dependant and this reversionary beneficiary must be nominated at the time of creation of the original pension. Under which section of SIS Act (or Reg) are your require to do this? Where does it say that the reversionary beneficiary most be nominated with the creation of the pension. As far as I know section 59 SIS Act is only applicable to BDBN. Greg blog Aaron, great discussions!

  10. How does reversionary pension work for a single member fund of a SMSF? When the sole member dies, does the the reversionary pensioner need to become a member of the deceased fund in order to this fund to satisfy its single member fund requirement. Also the reversionary pensioner is over 90 years old and is there an age limit to join an SMSF?

    • Hi Christine,

      Yes, you can nominate a reversionary beneficiary who is not a fund member. They will of course need to be appointed to the fundonce they become entitled to receive the income stream.

      Regards,
      Aaron

      • Aaron,
        In the case of a deceased SMSF member who had both been drawing a pension (with spouse nominated as reversionary beneficiary), and had made contributions into an accumulation account until date of death, what happens to the accumulation balance on hs death?

      • Hi Anuradha,

        How the accumulation death benefit will be treated will be subject to whether a tax dependant exists or not. Where there is a tax dependant, the benefits can be paid as a pension, lump sum or combination of both; if not tax dependant, then simply must be a lump sum. Where the beneficiary wishes to draw an income stream, the taxation of the death benefit pension will be subject to the age of the deceased member and/or the beneficiary.

        Regards,
        Aaron

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