By Anthony Cullen
Senior SMSF Technical Specialist
In a recent Ask SuperConcepts article Philip La Greca addressed a question relating to death benefit nominations. As part of his response he mentioned that a reversionary pension may be an alternate or complimentary method to dealing with death benefits inside of super.
This brings us to another commonly asked question; Can I convert my non-reversionary pension to a reversionary pension without commuting it?
Before I answer the question, let’s look at some of the differences between the two types of pensions.
A reversionary pension is one that is structured to automatically ‘revert’ to a nominated person (generally the spouse) upon the passing of the original pensioner. That is, the pension does not cease and will continue under the same terms & conditions, albeit with a new beneficiary. Often, the reversionary status is documented when the pension is established and is agreed upon between the member and trustees of the fund.
Whereas, a non-reversionary pension will cease upon the death on the pensioner. If the beneficiary wishes to retain the benefits within the superannuation system, they will need to start a new death benefit pension. As mentioned by Nicholas Ali in his recent Ask SuperConcepts article on death benefit lump sums, this does not mean the fund loses it’s entitlement to Exempt Current Pension Income attached to original pension during the period leading up to the new pension commencing.
Death benefits and Transfer Balance Accounts
Although the question of whether a pension can be changed has been asked for many years, there was an increase in the frequency of receiving such questions in the wake of the reforms that took place from 1 July 2017. It’s possible that this was driven more by the Transfer Balance Account implications, assuming a death benefit pension is to commence, more so than estate planning strategies.
So, what’s the difference when it comes to the Transfer Balance Account of the death benefit recipient?
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Reversionary
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Non-reversionary
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Date event occurs
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Date of death of original pensioner
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Date death benefit pension commences
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Reporting value of pension for recipient
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Determined on the date of death of original pensioner
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Determined on the date the death benefit pension commences
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Recorded in recipient’s Transfer Balance Account*
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12 months from the date of death of original pensioner
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As at date of commencement of death benefit pension
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*Not to be confused with reporting obligation that is connected to the event date
Death benefits and insurance
Although it is rare to see life insurance linked to a pension interest, in those cases where it does occur, the difference between a reversionary pension and non-reversionary pension can be significant:
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Reversionary
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Non-reversionary
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Allocation of life insurance proceeds
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Proportional between tax-free & taxable components per original split
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Allocated to taxable component 100%
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Value of pension for recipient for Transfer Balance Account purposes
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Account balance determined on the date of death of original pensioner. Will not include insurance proceeds as these will be allocated upon receipt, after the fact
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Account balance determined on the date the death benefit is commenced. Will generally include the insurance proceeds
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Can I convert my pension to reversionary after commencement, without commuting it?
If I may borrow from the lawyer’s playbook here, the answer is; it depends.
There is nothing in the legislation preventing such action. As such, it comes down to the pension agreement and/or trust deed of the fund, and what they may allow. The ATO have confirmed that this is their view as well. Do the terms & conditions of the pension agreement allow for changes post commencement? Is there a clause in the deed that may allow for adjustments post commencement? If not, will a deed update provide you with the opportunity?
So, it does depend on the paperwork. Not only do you need to consider the paperwork that may be in place before you look to make the changes, but also what you will need to put in place to document any changes that are made. One thing is clear from the ATO; you can’t change the terms after the member has passed away.
Why not just commute and restart a new pension?
Many will argue this is probably the cleanest approach that leaves less room for interpretation and challenges to the validity of any changes. In some cases, this may indeed be the most appropriate course of actions. In other cases, the flow on effect may deem it a strategy that you may want to avoid, if possible.
• Clients may have multiple interests; i.e. at least one pension account and an accumulation account. To commute the pension in order to start a new reversionary pension will result in the interest mixing with the accumulation interest. If the interests are made up of different tax free/taxable components, blending them may have adverse consequences for estate planning strategies that had previously been devised.
• If clients are eligible for social security benefits, commuting a pension with a start date pre 1 January 2015 will result in the loss of the grandfathering provisions that allow such pensions to be assessed under the rules as they stood prior to January 2015. The new pension will be ‘deemed’ for income purposes for both the age pension and Commonwealth Senior Health Card (CSHC). Grandfathered pensions have a different calculation under the income test for the age pension and are not assessed at all for the CSHC.
- In some cases, it may be in the member’s interest to be assessed under the deeming rules rather than the grandfathering rules. The impact to Centrelink entitlements from commuting a grandfathered pension could result in either a positive or negative outcome to the member.
What about removing a reversionary beneficiary?
It is more common to receive questions around adding a reversionary beneficiary rather than removing one. However, from time to time, circumstances do lead to member’s looking to remove a reversionary beneficiary. The main reasons for this are separation from, or death of, the nominated reversionary beneficiary.
To remove a beneficiary would require the same considerations as adding one. That is:
• what does the pension agreement and/or trust deed say on the matter?
• What is the impact of stopping and starting?
Another thing to consider is, what if I take no action after separating from my partner or they pre-decease me? When it comes to you passing away your benefits must be paid to a dependant, as defined under the Superannuation Industry (Supervision) Act (SIS), or your Legal Personal Representative. It could be argued that someone who does not meet the definition of a SIS dependant is not entitled to receive your superannuation benefits and any reversionary nomination would be invalid.
That would be a reasonable argument, but do you also need to consider the fact that a pension agreement is a contract. If the contract states your pension is to revert to a particular person, but to do so would result in a breach of SIS, do you refuse such a payment and risk a claim for breach of contract?
A couple more points on Centrelink
Whether you are looking to add or remove a reversionary beneficiary from a pension agreement and can do so without commuting the pension, where applicable, you may still need to advise Centrelink of the changes. Such action may result in a change in the ‘relevant number’ used by Centrelink in calculating the deductible amount on grandfathered pensions. This may impact on your social security entitlements.
In addition to this, reversionary pensions that are grandfathered for Centrelink purposes will continue to be so when they revert upon the member’s passing. Non-reversionary pensions, as mentioned above, will result in a new pension being commenced if the benefits are to remain in the superannuation system. These new pensions will be deemed for Centrelink income test and CSHC purposes.
Conclusion
When considering making changes to reversionary beneficiaries, it should not just be about the ‘can I’. Why are you considering this course of action in the first place? What are the impacts of the action and what are the alternate options (and their impacts)? And, when we think about this from an estate planning point of view; what is the impact of doing nothing and can that be suitably managed with say, an appropriately drafted death benefit nomination.
