Do you have a reversionary beneficiary in place for your super account?
Life is full of uncertainties and having your family protected in case you leave can be enough to give you peace of mind. Ensuring you have a beneficiary nominated for your reversionary pension is one of the prime examples of caring for your family even after you’re long gone.
What is a reversionary pension? What does it entail and how can your family benefit from it?
The Value of Having a Reversionary Pension
A reversionary pension is a form of income stream paid to a super member on a regular basis. In the event of the death of the pensioner, the income stream is continued but will now be paid out to the beneficiary nominated by the deceased super member.
A reversionary beneficiary is someone you nominate to continue receiving payments from your pension in case you die. It can either be your spouse or any eligible dependant like your children. For children to be eligible, they have to pass first any of the following criteria:
- They are under 18 years old.
- Those who are between ages 18 and 25 can still be nominated if they’re financially dependent on you.
- The child has a disability as defined under the Disability Services Act of 1986.
Reversionary beneficiaries can choose to receive the remaining balance from the pension in a lump sum or to continue receiving regular payments. A new account for the pension will be opened in case they choose to receive it in regular payments.
If the reversionary beneficiary dies too before the remaining pension balance runs out, it will be paid to the dependant of the beneficiary or to their Legal Personal Representative. It depends on who the beneficiary nominated before their death.
If the reversionary beneficiary is a dependent child who doesn’t have any disability as described in the 1986 Act, then the remaining balance must be converted to a lump sum payment when the child turns 25 years old. However, take note that this will incur taxation. The complicated requirements surrounding this option is the reason why many super funds only allow you to choose your spouse as the reversionary beneficiary.
Below are some more information you need to know about reversionary pensions:
- The pension paid out is generally tax-free but it can be taxed depending on the age of the beneficiary and the deceased person.
- Capital gains and earnings on the pension are free of tax up to an amount of $1.6 million.
- When the pension is received in regular payments by the beneficiary, the fund continues to remain in a super environment. However, receiving it in a lump sum may prevent the beneficiary from contributing the money back into their own super fund as imposed by the law.
- There’s no need to quickly fix papers for pension transfer upon the time of the death of the super member when everyone is grieving. When transfer to the reversionary beneficiary takes effect, the recipient of the pension will simply change from the deceased to the beneficiary so there’s no time limit for processing documents that the beneficiary should worry about.
- The amount of the reversionary pension received will be combined with the spouse’s pension, if applicable, when computing the balance transfer cap allowed for an individual. The transfer balance cap pertains to how much pension a person can receive tax-free and new laws has set it to $1.6 million. The good thing here is that there’s a 12-month window from the death of the pensioner before the reversionary pension is included in the transfer cap of the beneficiary.
- In the case of divorce or separation with your spouse whom you’ve nominated as your beneficiary, you’ll have to change and choose a new reversionary beneficiary. This process can be costly.
A reversionary pension provides a great advantage to the beneficiary for ensuring they receive tax-free payments. This will give you the assurance that your family will still be taken care of with the money you’ll be leaving in the advent of sudden death.
To nominate a reversionary beneficiary, simply fill out the form given by your pension provider. For those with an SMSF, it’s better to check with your provider whether or not they allow a reversionary pension. Make sure you complete the documents required by the ATO for nominating a reversionary beneficiary to avoid complications when the time comes.