Reversionary pension versus non-reversionary pension

Current as of March 2016

 

When a member of a superfund commences a pension they can nominate a reversionary pensioner if they want to.

So what is a reversionary pension?

Reversionary Pension

A reversionary pension is an income stream superannuation benefit paid to a member. Upon the member’s death the pension continues to be paid to a nominated reversionary beneficiary. The pension does not cease upon the death of the original pensioner but continues to be paid to the reversionary pensioner as though the reversionary pensioner was the original pensioner.

Non Reversionary Pension

A non-reversionary pension is an income stream superannuation benefit paid to a member which ceases upon the member’s death. The pension ceases and the member’s superannuation account balance then has to be paid out of the superfund as a lump sum, although in some circumstances a new pension can be commenced.

Reversionary beneficiaries

Only dependents can be nominated as reversionary beneficiaries. A dependent includes:

  1. A spouse
  2. A child under 18
  3. A child 18 to 24 who is financially dependent on the deceased
  4. A child over 18 who is disabled

Advantages of a Revesionary Pension

The main advantage used to be to ensure the tax free status of a fund paying a pension was continued. However, from 1 July, 2012 this exemption remains regardless of whether there is a reversionary pension as long as a death benefit is paid as soon as practical.

There are also other benefits:

  1. Insurance proceeds – retain their tax free and taxable components of the reversionary pension, whereas they are added to the taxable component for a non-reversionary pension. This can be important for death benefit payments to non- dependents (e.g. adult children).
  2. Social security – reversionary pensions commenced before 1 January, 2015 can receive some concessional treatment for social security assessment purposes.
  3. Estate security – the trustee of the superfund is not required to decide who should receive the death benefit as the pension will revert to the nominated beneficiary.

Disadvantages of a Revesionary Pension

 A major disadvantage in receiving a reversionary pension is in situations where a member divorces or separates from the reversionary beneficiary. In this event, the member will need to commute (cease) the pension and start a new one.

As always, if you have any more questions about pensions or reversionary pensions, then feel free to contact your client manager.

 

DISCLAIMER
This newsletter has been produced by Stanley & Williamson as a service to its clients and associates. The information contained in the newsletter is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas contained in this newsletter, it is imperative you seek specific advice relating to your particular circumstances. Liability limited by a scheme approved under Professional Standards legislation.