Depending on the terms of a self-managed superannuation fund’s (SMSF) deed and the terms of the pension, a member may be able to nominate a reversionary beneficiary from the beginning of the pension or at a later time using a death benefit notice or other variation document.
This article revisits some key concepts in deciding whether to, and how you may properly, nominate a reversionary beneficiary.
REVERSIONARY BENEFICIARIES – WHO ARE THEY?
A ‘reversionary beneficiary’ is the person who will continue to receive a member’s pension when the member dies (subject to an important qualification below).
The SMSF trustee cannot under superannuation law, pay the pension to a reversionary beneficiary if the person is not a ‘pension dependant’ (explained below) of the deceased member.
There can be tax or social security benefit implications in a pension ‘reverting’ to a beneficiary rather than the pension ceasing and a lump sum benefit being paid or cashing the member’s pension to purchase a new income stream.
HOW TO APPOINT A REVERSIONARY BENEFICIARY – WHEN COMMENCING A PENSION
It is best practice to fully document the terms of a pension in a written agreement between the member commencing the pension and the SMSF trustee when the pension commences.
Should the member wish to nominate a reversionary beneficiary at that time, the beneficiary should be named as the reversionary beneficiary in the agreement and the agreement should direct the trustee to pay the member’s pension to the reversionary beneficiary on the member’s death.
HOW TO APPOINT A REVERSIONARY BENEFICIARY – AFTER THE PENSION HAS COMMENCED
A properly worded pension payment agreement and/or SMSF deed may also allow for a reversionary beneficiary to be nominated by the member giving the SMSF trustee a binding notice in writing.
Importantly, the form of nomination of the reversionary beneficiary must be binding on the SMSF trustee and must not give the SMSF trustee any discretion as to whether or not to pay the death benefit as a pension, otherwise, the member’s pension may be deemed to have ceased and a new pension commenced.
Should the SMSF deed and/or pension payment agreement allow, one way for a member to nominate a reversionary beneficiary after commencement, would be by giving the trustee a notice:
- naming one of the member’s dependants
- specifying that that dependant is to receive the member’s account balance when the member dies
- specifying that the dependant is to receive the account as a pension,
so long as the notice fulfils the requirements of the Superannuation Industry (Supervision) Regulations 1994 (Cth).1
Alternatively, the agreement setting out the terms of the pension may be able to be amended to include a nominated reversionary beneficiary, by the trustee and the member/pensioner signing a document varying the terms of the pension.
WHO CAN BE A REVERSIONARY BENEFICIARY?
As noted above, a trustee may not pay a pension to a person nominated as a reversionary beneficiary unless that person is a ‘pension dependant’. Consequently, the only persons who should be nominated as a reversionary beneficiary are those persons who are expected to be ‘pension dependants’ at the date of death of the member.
The meaning of a ‘pension dependant’ is best understood by first considering the meaning of ‘dependant’ and then adding the meaning of ‘pension dependant’. Here goes.2
To be classified as ‘dependant’ under s10 of the Superannuation Industry (Supervision) Act 1993, the person must be in an ‘interdependency relationship’ with the member, or be the member’s spouse or child. Two people, whether related or not, are treated as being in an ‘interdependency relationship’ if:
- they have a close personal relationship
- they live together
- one or each of them provides the other with financial support
- one or each of them provides the other with domestic support and personal care.
To be classified as a ‘pension dependant’ and as a result be entitled to receive a pension on the death of a member, you must not only be a ‘dependant’ but also, in the case of a ‘dependant’ who is a child of the deceased, be:
- less than 18 years of age, or
- be 18 or more years of age and less than 25 years of age and be financially dependant on the member, or
- have a disability of the kind described in ss8(1) of the Disability Services Act 1986.
COMMON ISSUE 1 – REVERSIONARY BENEFICIARY NOT A PENSION DEPENDANT
If, at the time of the member’s death, the reversionary beneficiary is not a ‘pension dependant’ the trustee must refer to the provision of the SMSF deed as to how to deal with the members pension. For example, the SMSF trustee may be required to instead pay the member’s benefits in accordance with any valid death benefit agreement or death benefit nomination the member has in place.
If the member does not have any valid death agreement or death benefit nomination in place, the trustee may pay or apply the member’s benefit generally at the trustee’s discretion, subject to superannuation law and any specific rules set out in the SMSF deed.
The trustee will always be limited to paying or applying a member’s benefits as a lump sum where the benefit is being paid to a person who is not a ‘pension dependant’ at the time of the member’s death.
COMMON ISSUE 2 – WHAT IF THE NOMINATED REVERSIONARY BENEFICIARY DIES BEFORE THE MEMBER?
If the member’s nominated reversionary beneficiary dies before the member, then the trustee will be in the same position as if the reversionary beneficiary was not a ‘pension dependant’ and any valid Death Benefit Agreement or Death Benefit Nomination will apply.
COMMON ISSUE 3 – WHAT HAPPENS WHEN THERE IS A REVERSIONARY BENEFICIARY UNDER THE PENSION AND DEATH BENEFIT AGREEMENTS OR DEATH BENEFIT NOMINATIONS IN PLACE?
If a reversionary beneficiary is nominated in accordance with the terms of the pension (see above for valid nominations) and is a ‘pension dependant’, the trustee will generally be required to pay the member’s pension to the reversionary beneficiary and any death benefit agreement or death benefit nomination would be of no effect.
However, the terms of each of the following documents should be reviewed carefully to confirm this position:
- the SMSF deed
- any death benefit nomination
- any death benefit agreement
- any pension payment agreement.
The above principles apply to the pension being paid to the member. Any death benefit agreement or death benefit nomination will also be relevant in respect of any part of the member’s account balance which is not supporting the pension that ‘reverts’.
Finally, all of these documents should be considered alongside the member’s will so that you have the full picture: this is because a death benefit arrangement may direct the trustee to pay super benefits into the deceased’s estate and those benefits will then be dealt with in accordance with the terms of the will.