This is a blatant (if informal) opinion poll masquerading as an article on an issue I’ve been musing about recently. Firstlinks readers clearly think a lot about super strategies so I’m banking on some useful feedback in the comments.
Should pensions be reversionary (continuing automatically to a spouse when you die) or not?
I’ll declare a bias – I used to be a big fan of reversionary pensions in an SMSF 30 years ago. The tax settings were very different back then. Does anyone remember Reasonable Benefit Limits (RBLs)? Back then, your super was checked against your RBL when you started a pension and, if you died, it could continue to your spouse (ie a reversionary pension) with no check against their RBL (which was a good thing). But if the pension wasn’t reversionary, it was checked against the spouse’s RBL if they used the money to start a pension. Such a big difference in treatment made the case for reversionary pensions really easy.
But I have to confess I’ve fallen out of love with them in recent years and, if I was setting up a pension today, I think – reluctantly – I’d make it non reversionary.
It would be a bittersweet decision, because there are still some benefits.
Certainty
I like certainty in life – so if I wanted to make sure a spouse could take my super as a pension, I would quite like the idea of setting things up that way in the beginning. A reversionary pension is a neat way to do this.
But there are some caveats.
First – if you have a binding death benefit nomination that contradicts the reversionary pension (eg it requires all super to be paid to your estate) someone will need to read the trust deed carefully, and possibly get legal advice, to work out which one takes priority. And if it’s the binding death benefit nomination, that certainty you felt you had never really existed in the first place.
Second – there are downsides to certainty. It might seem like common sense that if there’s a surviving spouse, as much of your super as possible should continue to them as a pension. Maybe. But what if they’re 90 when you die and in fact it would be better to get the money to them via your estate? By continuing the pension, you’ve missed that chance. The spouse can certainly commute the pension and withdraw the money but they can’t fenagle it into your estate.
Transfer balance cap delays
I still love this one: if a spouse inherits your reversionary pension, they get to keep the pension running (with all the great benefits that brings) and nothing gets added to their transfer balance account for that pension for another 12 months. Even better, when the pension is eventually added in, the value that’s used is whatever the pension was worth when you died – not what it’s worth 12 months on.
Another nice little bit of certainty.
I don’t have a counter to this one – I think it’s a strong benefit of a reversionary pension.
Simplicity
It can be nice not to have to think about switching off pension payments when you’re mourning the death of a spouse. If the pension is reversionary, everything can just keep going. While the pension payments are technically now coming to the spouse not the deceased, many couples have pensions paid into a joint bank account anyway so there’s nothing to change.
But this too can backfire. It means there’s a minimum pension payment to make in the year of death. I’ve seen plenty of clients miss that one – thinking they only have to worry about meeting the minimum requirements for their own pension, not their deceased partner’s.
So what specifics do I have against reversionary pensions?
We don’t need them any more
There was a time when some of the important benefits of a pension potentially stopped if the pensioner died and the pension didn’t continue.
For example, multiple pensions for one person are all kept separate (which means they can be dealt with separately). This can have some valuable tax benefits that will help the spouse who inherits the super in their own estate planning. Similarly, pensions are special in that when they start, their ‘tax free component’ (the part that can go to adult children tax free) is locked in as a percentage of the balance. The percentage stays the same for as long as that pension exists. It’s very valuable because it means future growth also grows the tax-free component (whereas normally, growth from the fund’s investments all flows through to the taxable component).
But these days, the tax legislation specifically makes sure these features of pensions continue even after someone dies. That happens whether there is a reversionary beneficiary or not.
Total super balance considerations
Lots of us care about our total super balance because it’s used to work out if we can take advantage of particular rules. For example, only people with a total super balance of less than $2.1 million at 30 June 2026 can make non-concessional contributions during 2026/27. It’s even more important these days for people facing Division 296 tax. This tax is paid based on the proportion of your total super balance that exceeds $3 million.
The problem with reversionary pensions is that they are added to the surviving spouse’s total super balance immediately (no 12-month delay here).
For example, Anita and Greg both have $2 million balances in their SMSF, and both are providing reversionary pensions. If Greg dies in May 2027, and Anita doesn’t change anything, Anita’s total super balance at 30 June 2027 will be $4 million and she’ll be subject to Division 296 tax for 2026/27. In contrast, if the pension wasn’t reversionary, Anita might not start a pension with Greg’s super until the following financial year – meaning Division 296 tax wouldn’t be relevant until 2027/28.
I’m not suggesting Division 296 tax can be avoided entirely – just that Anita can put it off for a bit if the pension isn’t reversionary.
So what’s the verdict? I think I’m still on the “no reversionary pension” bandwagon but I know views vary.
Which way are you leaning?
Meg Heffron is the Managing Director of Heffron SMSF Solutions, a sponsor of Firstlinks. This is general information only and it does not constitute any recommendation or advice. It does not consider any personal circumstances and is based on an understanding of relevant rules and legislation at the time of writing.
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