Reversionary pensions – the Whats and Whys?

A reversionary pension is a pension which, on the death of the member, automatically transfers to a nominated individual who is called the reversionary beneficiary. 

Reversionary pensions have a number of significant advantages including:

• On the death of the member – the pension automatically and without interruption transfers to and is payable to the nominated reversionary beneficiary. The pension does not stop on the death of the member  and therefore no new pension balance is required to be determined; no new pension is required to be issued and no new minimum payment amount has to be calculated in respect of the financial year in which the member dies.  A new minimum payment amount will be determined for the following financial year using the 1 July pension balance and the reversionary beneficiary’s then attained age.

• As no pension balance has to be determined as at the date of death, the cost of preparing interim financial statements as at the date of death is avoided.

• No active decisions have to be made by the trustee as to allocation of the pension account balance as a death benefit.

The main disadvantages of reversionary pensions are their inflexibility (which is much overstated) and the inability to name independent adult children as reversionary beneficiaries (which is misunderstood).

As for the inflexibility disadvantage – this is much overstated for modern pensions, such as account pensions and allocated pensions.  If the terms of the pension (and the trust deed/governing rules of the self managed superannuation fund) permit, it is possible without breaching superannuation law or incurring adverse tax consequences, to change a nominated reversionary beneficiary without stopping the pension. 

For example, the pension could name Eddy as the reversionary beneficiary and subsequently the terms of the pension could be changed to name Bertram without stopping the pension.  Additionally, a pension which is initially non-reversionary could be made reversionary without stopping the pension.  And, finally to complete the universe of possibilities, a reversionary pension could be made non-reversionary without stopping the pension.  It all depends on the terms of the pension and the terms of the trust deed/governing rules of the relevant superannuation fund.

The good news is that the SUPERCentral Governing Rules and pension documents (and the Townsends Business & Corporate Lawyers Governing Rules and pension documents) do permit changes to the reversionary status of pensions to be made without stopping the pension.

As to the inability to name independent adult children as reversionary beneficiaries  -  this objection misunderstands the prohibition on independent adult children receiving income stream benefits.

Superannuation law does not permit death benefits to be paid as income streams to independent adult children.  However, the death benefit can still be paid as a lump sum.  Consequently, independent adult children can be named as reversionary beneficiaries but their benefit can only be paid as lump sum.