Reversionary Pension Kit – SMSF Pension

Reversionary Pension Kit Book Cover
  • Reversionary Pension Kit

  • $440 includes GST

Reversionary Pension Kit for SMSF Pension

Your Reversionary Pension kit for the SMSF Fund allows for Account-Based Pensions. When you build this Account-Based Pension you get:

  1. Law firm letter of Advice – confirming what you need to do
  2. Trustee Minutes – to adopt and accept the Deed of Variationreversionary pension kit smsf self managed super fund account based pension
  3. Deed of Variation – updates your SMSF Deed to allow for Pensions and Reversionary Pensions
  4. Product Disclosure Statement – required to start a Pension
  5. Member Nomination Instruction – allows the member to tell the trustee that the member wants to start a pension (and who gets the pension when the member dies)
  6. Binding Trustee Resolution – to accept the Member Nomination Instruction

My SMSF is out of date. It does NOT allow for Account-Based and Reversionary Pensions

The Reversionary Pension kit updates your SMSF Deed as well.

Your SMSF Deed is updated. This is so that you can have both Account-Based and Reversionary Pensions.

The updating of your SMSF Deed, as part of the kit, ensures that your SMSF allows for the pension and Reversionary Pension to operate. This is according to the Superannuation legislation.

What is a ‘reversionary pension’?

It is often difficult to get wealth into Australian superannuation.

Superannuation is a tax haven. It is primarily to support your retirement.

Upon your death, you obviously no longer need money for your retirement. Therefore, your wealth in your superannuation fund leaves the tax-protected status of the superannuation fund. Your superannuation is paid out to your dependents or your estate.

When you die your superannuation must leave your SMSF fund?

That is true. At death your superannuation must leave the superannuation fund.

However, there is an exemption to this rule that super leaves your superfund at death.

Instead, you may direct your SMSF trustee to make your pension ‘auto-reversionary’. This means at your death automatically your pension transfers from you to your:

  1. spouse
  2. children under 18
  3. children under 25 living with you
  4. your disabled child of any age

This must be, at the moment of your death, ‘automatic’.

I am a director of the SMSF’s corporate trustee. Can I get the reversionary pension?

A person who is a director of the corporate trustee of your SMSF fund cannot take your reversionary pension just because they hold that position.

This is unless they are in one of the above 4 groups.

For example:

  • Your brother is a director of the SMSF corporate trustee company.
  • Your brother may also be a member of the same SMSF.
  • But he cannot get a Reversionary Pension from you.
  • This is because he is not one of the four above groups.

Can another member of my SMSF get my reversionary pension?

As above, it is not relevant whether a person is also a member of your SMSF.

Rather, it is only relevant if the person is your spouse, child under 25 or disabled.

Does the person getting my reversionary pension need to be a member of my SMSF?

There is no requirement that your spouse or children be members of your superannuation fund.

It is irrelevant for a reversionary pension whether the person who takes over your pension at death is a:

  • trustee of the SMSF;
  • director of the SMSF corporate trustee; or
  • a member of the same superannuation fund.

It just makes no difference.

What happens to a reversionary pension once my child turns 25?

Over 95% of reversionary pensions are to the spouse. Rarely is a Reversionary Pension set up to go at your death to a child.

This is partly because when you die, on average, your children are well above 25 years of age. They are often in the 60s!

Even if you are unlucky enough to die when your children are young, they don’t get to keep your superannuation reversionary pension for long.

When your child eventually turns 25 the pension finishes (commuted).

Are the reversionary pension rules different if  my child is ‘disabled’?

Yes, the rules are different for disabled children.

The reversionary pension finishes when your child turns 25. This is unless the child is disabled.

If your child is ‘disabled’ it can continue.

Is a reversionary an ‘income stream’ rather than a ‘lump sum’ amount?

Excuse the circular definition. But your reversionary pension is a ‘pension’.

Another expression for a ‘pension’ is an ‘income stream’. It is a regular sum of money coming to you. The opposite of an ‘income stream’ is a ‘lump sum’ payment. For a ‘lump sum’ payment you get all the money at the same time.

A reversionary pension is an income stream.

Reversionary pensions often do not work. Is that true?

Yes, reversionary pensions are delicate. 

You set up your pension in your SMSF. You then make sure it is an automatic ‘reversionary’ pension in your SMSF.

To operate the reversionary pension must ‘automatically’ continue from the moment of you die.

You are telling your SMSF what you want with your super when you die. You want your pension to continue after you die. But to now go to your spouse instead of you (as you are dead).

Do I need to have started a pension before I can set up a reversionary pension?

Yes. Obviously, you need have started a pension before you die.

A pension is an ‘income stream’. You need to have started a pension before you die, otherwise, you cannot provide a reversionary pension to your spouse or children.

SMSF Pension exemption

However, there is an exemption to this rule that super leaves your superfund at death. Instead, you may direct your SMSF trustee to make the pension auto-reversionary. This means at your death your pension transfers from you to your:

  1. spouse
  2. children under 25
  3. disabled child of any age

A person who is a director of the corporate trustee of your fund cannot take your reversionary pension just because they hold that position. This is unless they are in one of the above. Similarly, it is not relevant whether a person is a fellow member of your fund. Rather, it is only relevant if you are a spouse, child under 25 or disabled. There is no requirement that your spouse or children be members of the same fund.

When a child eventually turns 25 the pension finishes (commuted). This is unless that child is disabled.

A reversionary pension is an income stream. You set it up with your SMSF. To operate it must ‘automatically’ continue to (generally) your spouse when you die.

You are telling your SMSF what you want with your super when you die. You want your pension to continue after you die. But to now go to your spouse instead of you (as you are dead).

Obviously, you need to start a pension before you die. A pension is an ‘income stream’. You need to have started a pension before you die, otherwise, you cannot provide a reversionary pension to your spouse or children.

SMSF Pension must be ‘automatic’ at death

The ATO describes a reversionary pension in Taxation Ruling TR 2013/5 [29]):

A superannuation income stream ceases as soon as a member in receipt of the superannuation income stream dies. This is unless a dependent beneficiary of the deceased member is automatically entitled. This is under the governing rules of the superannuation fund or the rules of the superannuation income stream, to receive an income stream on the death of the member. If a dependent beneficiary of the deceased member is automatically entitled to receive the income stream upon the member’s death, the superannuation income stream continues.

The ATO provide further guidance in the Law Companion Ruling LCR 2017/3 [12]

A reversionary death benefit income stream is a superannuation income stream that reverts to the reversionary beneficiary automatically upon the member’s death. That is, the superannuation income stream continues with the entitlement to it passing from one person (the member) to another (the dependent beneficiary). [italics by Legal Consolidated]

Are SMSF Pensions automatic?

The new Deed of Variation to your Self-Managed Superannuation Fund allows for Reversionary Pensions. But they are not automatic. You set them up as part of the pension establishment. They also need to be set up for each pension. (They are obviously not part of the Binding Death Benefit Nomination.)

Rather they are part of a pension establishment. The recipient (assuming they fall under the definition of dependent) can either take the benefit as a pension or a lump sum. This decision is largely dependent upon whether they are already in receipt of a pension and also the liquidity of investments in the Self-Managed Superannuation fund.

This SMSF Pension allows for reversionary pensions. But you need to activate them. 

Does superannuation have to be paid out at death?

Yes, unless you have a Reversionary Pension in place or reserve accounts all your superannuation must leave your Superannuation. To labour the point, you super leaves the superannuation environment. It is paid out. This explains the rule:

  1. The sole purpose of your super is for your retirement.
  2. To encourage you to lock money away into your superannuation the Australian government offers generous tax incentives.
  3. Therefore, many in the government see your Superannuation as a ‘tax haven’.
  4. At death, you no longer have any need for ‘retirement’ money, as you are dead.
  5. At your death, all your super leaves the superannuation environment. It is all paid out. (This may be according to a binding nomination or the trustee’s discretion – but it must all be paid out.) Your super balance at death goes to zero.
  6. At death, the wealth in your super can no longer remain in this ‘tax haven’. It is paid out.
  7. The people that get your super may be able to put some of it back into their own super. But probably not much. It is certainly not the case that your family can keep the super in the SMSF and just allocate it to themselves. That is is a common belief. But it is wrong.
  8. There is one major exception to your superannuation being paid out at your death. This is called a Reversionary Pension. This is the document you are building. 

When Dad dies can his super stay in the SMSF and be allocated to my super account?

Most people die without a Reversionary Pension in place. In those instances, the superannuation is paid out. It completely leaves the superannuation environment. For example, Dad dies with $1m. He only has his son. His son is over 25 years of age and not disabled.

His son gets the whole $1m (minus the 32% tax on his dead Dad’s super). But the son actually wants his Dad’s super to remain in the super fund and just be allocated to him. Well, you cannot do that. Instead, the son gets the $1m in his personal bank account or he gets the shares or the land. If the son now wants to contribute $1m into his super fund then he has to follow strict rules. Just like everyone else. At best it takes the son many years to get $1m into his super fund. Well, that is just the way it is.

Can the father set up a Reversionary Pension for his son? No, of course not. Reversionary Pensions are only for a spouse, children under 25 or disabled children. Since the son is none of those it is not possible for him to have a Reversionary Pension from his Dad.

Instead, Dad builds a 3-Generation Testamentary Trust Will. This contains a Superannuation Testamentary Trust. This

often reduces the 15% or 30% death taxes to zero.

Does this Reversionary Pension Kit damage old pensions and reversionary pensions?

Q: The Death Benefits 7.1 states “… and any pension account residue either as a lump sum, or as one or more pensions or annuities, or both”.

Does the wording of the Legal Consolidated Reversionary Pension Kit recognise that the nominated Reversionary pension beneficiary (documents established prior to the new Deed Update) takes precedence over the new Death Benefit Agreement or Death benefit nominations?

A: All Legal Consolidated SMSF Deed updates including the Replace a lost SMSF Deed  seek to preserve pre-existing pensions. Accordingly, the Legal Consolidated Reversionary Pension Kit seeks to grandfather and protect earlier pensions. This includes Reversionary Pensions. You just need to check with your accountant and financial planner that you indeed have operational pensions and correct reversionary pensions.

The Legal Consolidated Reversionary Pension Kit cannot fix up old or failed pensions. It is designed for future reversionary pensions. And, as stated above, not to stop old operational pensions.

You ask whether old pensions ‘take precedence’. I do not think that is the correct question.

The Reversionary Pension Kit is just an update to your SMSF deed and the paperwork to put in place a reversionary pension. After you build the kit then you set up as many or as few reversionary pensions as you wish. As often as you wish.

Transfer Balance Cap can damage a SMSF Pension

SMSF pensions allow your spouse’s super to remain in super after they die – but there are problems. You can have more than $1.6m in your Superannuation fund. However, your pension is limited to $1.6M: Division 294 ITAA 97 (transfer balance cap).

A matter of concern for your adviser and accountant about the use of Reversionary Pensions is the Transfer Balance Cap (TBC). This is for each pensioner. We believe that modelling is required. This is regarding the impact on the beneficiary potentially receiving a Reversionary Pension.

When someone leaves a reversionary pension for their spouse, the value of the pension for the $1.6 million pension cap is frozen at death.

What do my financial adviser and accountant consider for the Transfer Balance Cap?

  • Would this cause the recipient to go over the TBC?
  • Is the recipient already receiving a pension?
  • Is there the capacity to commute any existing pension to manage the TBC?
  • Would a death benefit pension created using a BDBN be more appropriate?

Items 1 and 2 in section 294-25(1) Income Tax Assessment Act 1997 state that a transfer balance credit arises for a reversionary beneficiary’s transfer balance account. But when does it arise? It arises 12 months from the date the pension reverts to you. This is 12 months from the date of your spouse’s death. At that moment in time, the transfer credit’s value is the value of the income stream as at the date of death (date of reversion).

What if your own superannuation income stream and together with your reversionary income stream exceeds your transfer balance cap? If so then this is time-critical. In this case, you must deal with the reversionary income stream (reversionary pension) within 12 months of death. Otherwise, you suffer an excess transfer balance.

Are death nominations, including non-lapsing binding nominations, subservient to a Reversionary Pension?

Usually a fully compliant legally prepared Reversionary Pension overrides a Death Benefit Binding nomination (Binding Nomination). But that is not always the case. You need to read the SMSF trust deed.

However, Legal Consolidated documents and variations are drafted so that a Reversionary overrides a Binding Nominations. These documents are structured so that the Binding Nomination is subservient to the Revsionary Pension:

SMSF Deed – built over 18,000 times  
Special Purpose Company – to be trustee of SMSF  
Convert old Company into a Special Purpose Company – to be trustee of SMSF  
Investment Strategy – ATO audit friendly  
Vest and Wind up SMSF – wind up, end and close down old SMSFs – get rid of your SMSF  
SMSF Loan to Third Party  
Commercial lease for SMSF – where the SMSF owns the commercial property  
Reversionary Pension Kit – keep your dead spouse’s super in Super Fund  
Power of Attorney for SMSF Corporate Trustee – if director dies or dementia, compliant with Fund Manager release forms  
SMSF Training Course – includes the SMSF Deed  
Update your SMSF Deed for:  
        1. Everything – Update Trustee, Upgrade Deed, Binding Nomination and PDS (Recommended)  
        2. Trustee only  
        3. Upgrade Deed only  
        4. Binding Nomination only – updates SMSF Deed as well  
        5. Product Disclosure Statement only – fully compliant with budget  
Other SMSF updates
Change SMSF name – no CGT or stamp duty issues  
Replace a lost SMSF Deed – no Court order required

Do Reversionary Pensions always override a SMSF Binding Nomination?

It is not correct to assume that a SMSF reversionary pension, even one prepared by a law firm, always applies before a Binding Nomination. Some SMSF deeds are silent on which prevails. Therefore, it is prudent to upgrade your SMSF Deed to a Legal Consolidated SMSF deed.

 

Can I get free legal advice as I build my SMSF Pension Kit?

There are hints as you build your Pension Kit. For more legal advice telephone us or Chat with us.

reversionary pension kit smsf self managed super fund account based pension
reversionary pension kit smsf self managed super fund account based pension

reversionary pension kit smsf self managed super fund account based pension

reversionary pension kit smsf self managed super fund account based pension

reversionary pension kit smsf self managed super fund account based pension

 


Legal Consolidated Barristers & Solicitors Australia Brett Davies

Adj Professor, Dr Brett Davies, CTA, AIAMA, BJuris, LLB, Dip Ed, BArts(Hons), LLM, MBA, SJD
Legal Consolidated Barristers and Solicitors
National Australian law firm

National:   1800 141 612
Mobile:      0477 796 959
Email:       [email protected]


14/07/2020

Reversionary Pension Kit – SMSF Pension

Reversionary Pension Kit for SMSF Pension Your Reversionary Pension kit for the SMSF Fund allows for Account-Based Pensions. When you build this Account-Based Pension you get: Law firm letter of Advice – confirming what you need to do Trustee Minutes – to adopt and accept the Deed of Variation Deed […]