Reversionary Pension Kit – SMSF Pension

Reversionary Pension Kit for SMSF Pension

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

  1. Trustee Minutes – to adopt and accept the Deed of Variationreversionary pension kit smsf self managed super fund account based pension
  2. Deed of Variation – updates your SMSF Deed to allow for Pensions and Reversionary Pensions
  3. Product Disclosure Statement – required to start a Pension
  4. 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)
  5. Binding Trustee Resolution – to accept the Member Nomination Instruction

Updating your Deed allows: Account-Based Pensions and Reversionary Pensions

The Deed of Variation updates your SMSF Deed (and any variations). It ensures that your SMSF allows for the pensions 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 superannuation. It is a tax haven designed 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. They are your only two choices.

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. 

Pensions vs Binding Nominations

  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 massive tax incentives.
  3. Superannuation is 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 fund and just allocate it to themselves – that 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. 
But I want Dad’s super to stay in the fund 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.

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.

Your financial advisers and accountants consider:
  • 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?

Any death nominations, including non-lapsing binding nominations, are subservient to a Reversionary Pension.

Items 1 and 2 in section 294-25(1) 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.

There are hints as you build your Pension Kit. For more legal advice telephone 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

 


Reversionary Pension Kit SMSF self managed superannuation fund

Dr Brett Davies, CTA, AIAMA, BJuris, LLB, LLM, MBA, SJD
Adj Professor, UWA Law School
Adj Reader, Curtin Business School
Legal Consolidated Barristers & Solicitors

Mobile: 0477 796 959
National: 1800 141 612
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 of Account-Based Pensions. When you build this Account-Based Pension you get: Trustee Minutes – to adopt and accept the Deed of Variation Deed of Variation – updates your SMSF Deed to allow for Pensions and […]