Meg on SMSFs: What do we think about reversionary pensions these days?

Given the advantages of having a reversionary pension go to my spouse which has a large taxable component (so it can go to her tax free as well as withdrawals) and then a second pension with all tax-free component can to into a testamentary trust for my niece and nephews and their children I like the reversionary pension option. Plus it makes things easier and simpler at the start for my spouse without potential delays or hassles.

I think simplicity is the strongest argument. Not making the pension reversionary wouldn't stop you with your other plans : you could still leave the pension that is 100% tax free to your estate and have the other pension account paid to your spouse as a (new) pension even if it wasn't reversionary.

We now know that testamentary trusts will be exempt from the new minimum 30% tax on trust distributions. Better yet, minors under the age of 18 will continue to be taxed as adults with low marginal tax rates and a tax-free threshold of $18,200 instead of the punitive tax rates paid by children at present on income distributed from a family trust.

But testamentary trust distributions are still taxed. Compare that tax treatment with a SMSF paying a pension. The fund pays no tax on investment earnings and the member pays no tax on pension withdrawals from the fund. The catch is that in an SMSF, all members must be trustees and all trustees must be members. That means a SMSF can only pay a pension to an adult child from the age of 18 to 25 (if they are a student) at which age their super death benefit must be cashed out, unless they have a disability. And then an intellectual disability will often disqualify them from being a trustee.

Testamentary trusts are ideal for providing for minors and people who cannot manage their own affairs. Adults with a disability may find that the income they collect from a testamentary trust may impact any Centrelink benefits they receive, but they may have access to a (government approved) Special Disability Trust which has generous Centrelink concessions for both a donor and the beneficiary of such a trust and can be set up through your will from your estate.

I am not sure how superannuation money, left to a spouse (non reversionary money) can be deposited into superannuation if both partners exceed total balance cap prior to death.
Money will remain outside super.
Could you please clarify.

Ah right I can see the confusion. What I'm saying in my article is that it would never actually leave the super environment. When someone dies and they're NOT receiving a reversionary pension (either their money is still in accumulation phase or a pension that's non reversionary), the trustee needs to "do something" with their death benefit. Doing something can mean paying it out as a lump sum or leaving it in super to pay a (new) pension to the beneficiary (in this case, the spouse). Importantly, the money hasn't come out of super in the process, it's remain in super but is paid as a pension. In many ways it's just like a reversionary pension. The key is that it's not automatic - which allows you to deal with some of the timing issues I've raised above (eg the new pension doesn't have to start immediately, it might start a few weeks or months later - in a new financial year).

The new pension would need to "fit" within the beneficiary's transfer balance cap so if they've already used all their cap, they would need to switch off their own pension. But they're going to have to do that anyway (eventually) if they have a reversionary pension. That's because the reversionary pension will be checked against their transfer balance cap too.

I have been involved in helping a couple of friends sort out their super with the Super Funds after the death of a spouse. It has generally been horrendous, except for reversionary pensions. I even had a case where the deceased’s accumulation account wasn’t paid for 4 months for lack of a death certificate when the fund clearly had it as they had paid the reversionary pension. We are sticking with the reversionary pension. The almost immediate continuation of that income can be very important to many people. As for tax implications, of whichever one of us survives will have, who cares? The survivor will have the same income as previously but with substantially reduced expenses. Let the government have a tiny bit and don’t worry about it. If you have those tax issues you can afford it.You’ve just lost your life partner. Mourn them then get on wth your life. I know, been there.

If my super was in a public super fund I would have a reversionary pension or a binding death benefit nomination - for sure. Those funds don't seem to be able to get death benefits dealt with promptly :). My question probably should have been targeted more specifically at SMSFs - where the surviving spouse often still controls what happens and can make sure they get money out (start a pension, take a lump sum) if they need it.

Great article, Meg.
I wonder whether reversionary pensions are becoming a solution in search of a problem. The 12-month transfer balance cap concession is undoubtedly valuable, but many of the other advantages now seem historical rather than current. Against that, the immediate impact on the survivor's total super balance is becoming increasingly relevant in a Division 296 environment. There is also much to be said for flexibility. Circumstances at the second death can be very different from those anticipated when the pension was established, and preserving optionality can sometimes be more valuable than locking in an outcome years in advance. One of the comments raises an interesting question about whether the ability to direct benefits through an estate and into testamentary trusts may, in some cases, outweigh the relatively short-lived benefit of the reversionary pension concession.

Totally agree Rachael - what seems logical and right when a pension is first set up may be exactly wrong for the family when the pensioner eventually dies. This is why (in an SMSF) I like the flexibility.

My wife and I each have two income streams within our SMSF (one tax free, one not). In the event of a death now, the combined TBC would be just under (or borderline) to be captured under Div 296.
We have reversionary pensions on all four streams atm. Our BDBN is consistent with that.
While we remain outside of Div 296 amounts, we will stay with reversionary positions, but this may change as other circumstances change down the line.
Like my namesake above, I expect we will "substantially reduce all Super by 85 or terminal prognosis" in due course.

Meg - have junked the concept as both over TBC and both running foul of 296 - just does not work. As Death Tax looms, my working assumption is to run with the Sec 296 "wealth tax" for now and substantially reduce all Super by 85 or terminal prognosis. A reversionary pension no longer relevant

For smaller balances, or balances that are significantly tilted to one spouse, as would be the case with my adult children, probably still work

Meg - Our SMSF has been running for just over 30 years (and yes I remember RBLs). We are both over the TBC through growth and minimum withdrawals. Both our accounts are currently reversionary. The recent welter of legislation/regulation has caused us to revisit the reversionary question a number of times. The current view is leaving them for the moment which means that (barring large lump sum withdrawals to the family) in the event of a death, more can be retained in super - albeit in the accumulation account of the survivor. I do however agree with Rob's comment above about making big changes by age 85 or thereabouts. A key factor facing us is the dramatically increasing compliance complexities at a time when our analytical faculties are bound to head in the opposite direction.

We each have a couple of pension accounts in the SMSF, with both of us are over the TBC through investment growth greater than drawings. We’ve made the 100% tax free ones reversionary along with my wife’s main pension with about 50% tax free. However my main pension is less than 20% tax free and this is non reversionary as it will leave the system when one of us passes away and the balances are eventually owned by the survivor.
The benefit of the delay of the TBC impact is probably the key for us due to the high balances of each account.

I guess having one non reversionary gives an added degree of flexibility. Very interesting though and in truth the first pension was created without actually considering making it reversionary.

Lots to consider. For example, Mr X has terminal diagnosis and reversionary pensions to surviving spouse and an accumulation account with large death benefit tax risk. Withdrawing the accumulation account prior to death avoids death benefit tax and creates capital for a Testamentary Trust to benefit spouse and next generation(s) including school fees for minors. Circumvents the 30% trust tax and 30% minimum CGT borne by low-rate taxpayers. Coincidentally, reversionary pensions to spouse will allow most of the capital to stay in tax preferred super environment once spouse frees up cap space and also stay under Div 296 limit.
Conclusion: multi-pronged approach protects against current tax imposts and future legislative risks.

Agree Jeff - lots to consider. One point to make though : the reversionary pension is not essential in allowing most of the capital to stay in super. All that's necessary to make that work is having the death benefit paid as a pension. This is a choice the trustee can make at the time OR it can be built into a binding nomination. The key difference between that an a reversionary pension is that a reversionary arrangement makes it automatic and immediate leaving you no time or opportunity to make different choices.

I know super is about money, money is important but is not the only important thing in twilight time.
Many of the cons of reversionary pension such as the need to take out the minimum pension on the combined balance can be addressed if the super is held with a reputed APRA fund (and not an SMSF with the couple as directors which exacerbates the stress).
Additionally we can only plan based on the current tax regime where periodical changes ( and complex ones) are more than likely at the whim of the government in charge.
Based on the above, I and my wife have opted for the relative safety and peace of mind of reversionary pensions, accepting that it may yet prove sub optimal with hindsight. Ophthalmology has not yet invented hindsight, and cutting things so fine to benefit from the last cent is in my view chasing the yonder horizon. Retirement planning need not be a zero balance sprint!
With one caveat: the surviving spouse should be strongly advised to take advice on the death of the partner so as to not miss out on then available options including cashing out of super to avoid the punitive 17% ‘death tax’ on payments to non- tax dependents.
And I am an actuary.

At the moment we are relying on the reversionary method working. When new rules were introduced, the combination of my CPS pension being multiplied x 16 (regardless of your expected years left) plus my minimum take from a separate super acct meant I busted the then (and fixed for me) $1.7m cap. Thus I had to open a $200k accumulation account. My wife's smaller CPS x 16 plus her larger separate super account was below the cap. We calculate that if I go first she will get 5/8th of my CPS plus both streams from the separate super. Thus she will bust the cap (whether she is stuck with $1.7 or will be allowed the latest cap I do not know). In any event she will bust the cap and taking over and adding to my accumulation account. Our thinking on the last one standing is that there is no need to concern ourselves with the CPS income, which dies with you. But the survivor will, we hope have enough time to designate our two sons (or one as the manager, if necessary) as reversionary beneficiaries and to keep super out of the estate. And the survivor will probably also try to run down the challengeable estate, which by selling off the retirment village apartment and moving to the nearby care facility on a per diem basis, rather than a REV (or whatever they are called). Given the horror stories about super funds acting as a god against the wishes of the dearly departed, I shall watch this thread closely.

I seriously question the idea here that one can nominate an adult child as a reversionary pensioner for the following reasons.

1. You need to nominate the reversionary when the pension is set up.

2. The reversionary nominee must meet certain conditions at the date of your death eg being a spouse, child under 18, financial dependency, etc.

A reversionary pension automatically continues to an eligible beneficiary upon the death of the original member. A non-reversionary pension becomes a superannuation death benefit. Death benefits can only be paid out in one of two ways. It can be used to start a new pension, or it can be taken as a lump sum payment to eligible beneficiaries.

That is an important distinction when it comes to the Commonwealth Seniors Health Card (CSHC). The CSHC has a number of valuable medical and pharmaceutical benefits available only to self-funded retirees. It has an income test but no assets test. The income test is based on taxable income, but money drawn from a super account is not taxable income. Since 1 January 2015, a super pension balance is deemed as additional income in the income test, but an accumulation account is ignored altogether because it doesn’t produce an income.

Retirees who held this card before that date were grandfathered and their super pension is never deemed, as long as there are no changes to that pension. It means that transferring to a different super fund, or commuting part or all of the pension to accept a new contribution to start a new pension will mean the grandfathering is lost, because all new super pensions are subject to deeming.

Importantly, the grandfathering is preserved when the super pension is inherited by the beneficiary in its original form. Given the benefits of the CSHC, it is highly desirable to preserve the grandfathering for the surviving spouse, particularly as the income test for a single person is lower than for a couple. Grandfathering can only be preserved if the super pension is reversionary, because, although a non-reversionary benefit can start a new pension, any new pension is subject to deeming.

Many thanks Jon, That is an exceptionally useful post, we have our pensions as revisionary at present but my CSHC super income is grandfathered so if I am the survivor I don't want to have to reset to my partners pension, so will make hers non-revisionary. Good to hear from you.

Meg - Further to my comments above, thought occurs to me. If our strategy was to conclude that it was better to cancel one or both of our reversionary arrangements, I would say it unclear to me what the mechanism for properly cancelling a reversionary agreement might be (other than carefully reading the deed). I mention this because there has been some chatter about it in various comms channels recently. Other may have the necessary wisdom and/or warnings.

I see real benefit in a reversionary pensions for younger couples, particularly with an age gap. We’ve structured my husband’s pension as reversionary (age 62, retired due to invalidity) so I can continue to receive an income stream while still working and under preservation age (I’m 57) in the event of his early death. Hopefully we won’t need it!

I see your plan Fiona (particularly around not needing it :)). One point to make : you can achieve the same result even if your husband's pension is NOT reversionary. Even if it wasn't, and he died, the trustee can still pay his balance to you as a (new) pension. The tax treatment is also the same (ie, as he's over 60, it would be tax free to you no matter your age).

Tim, I think you will find that the total balance cap limits contributions, but a super death benefit is not a contribution. That benefit can only be taken as a pension or a lump sum. It cannot be placed in an accumulation fund.
That new pension is included in the beneficiary’s personal transfer balance cap (TBC). That can be managed by commuting some of their own pension to accumulation to make space for the new pension under the TBC, but then they may need to manage their total super balance and the Div 296 tax.
There are now definite limits on the amount of concessionally tax super that any individual can benefit from.

Jack, thank you for clearing up, my mis-understanding.

Our approach is to have a portion of our sale of home proceeds transfer into super when we decide to move into managed accommodation.. Meanwhile we try to leverage a portion of aged pension into our income stream and receive the substantial free benefits available from State and Fed Govts' by maintaining our SMSF balance within the means tested range.

I'm turning 60 in 5 weeks and plan on turning my SMSF entirely to a reversionary pension. My wife is 56 and the income from the pension will more than cover all her outgoings (zero debt no mortgage) if I pass I know she will have no issues covering any bill.

I retired early at 58. She earns $20k a year from a small job

REALLY appreciate the comments and insights everyone. Something that leaps out at me is how many people are planning to leave super in place after the death of the first one of you and a spouse. That makes a lot of sense for many people - although the equation changes if you're older. A reversionary pension is certainly one way to achieve it. All in all, I'm also getting the message that simplicity is a great thing at that time - I so agree. Funnily enough, the main thing I don't like about reversionary pensions is that the inheritance is immediate and automatic (bad if you wanted to make different choices or slow things down) - and that's EXACTLY the feature of reversionary pensions that makes them simple :). I guess I can't have my cake and eat it!

Great article Meg, agree with you, especially given the Div 296 implications on reversionary pensions for members with large super balances. That said, reversionary pension may still make sense in some situations: for example, for blended families, where reversion is automatic and takes effect before any change in fund control, so the intended spouse receives the death benefit without relying on a BDBN that could be challenged; and for aged members wanting to spare a grieving spouse admin hassle, provided they're not exposed to Div 296. So a proper review with a lawyer and adviser is important.