Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 28

Reversionary versus non-reversionary income streams

In last week’s article, we examined recent amendments relating to death benefit pensions.

This week, we look at whether a reversionary or non-reversionary pension may be better. The decision is not straightforward and depends on the circumstances of the case.

In the case of a non-reversionary pension, the balance of the pension at the time of the pensioner’s death retains the same taxable and tax free proportions, but amounts which relate to anti-detriment and the proceeds of an insurance policy will have their own taxable and tax free amounts. In some cases, this may be to the advantage of the beneficiary and in others it may not. It all depends on the age of the pensioner at the time of death and whether the superannuation fund may have claimed a tax deduction for insurance premiums. In the case of an SMSF the funding of an anti-detriment payment is an issue which usually involves transfers of amounts from reserves and may result in issues with breaches of the excess concessional contributions caps – to be avoided at any costs.

In the case of a reversionary pension, the proportioning rule retains the taxable and tax free components of the original pension irrespective of whether the proceeds of an insurance policy are added to the pension balance after it has commenced.

Here is a case study to compare how these rules operate for the proceeds of an insurance policy:

Take the example of Ray who is age 58 and his wife Paula who is 55 and was in receipt of a transition to retirement income stream which was reversionary at the time of her death. The balance of Paula’s income stream at that time was $400,000. Under the proportioning rule the income stream was split 80% taxable proportion and 20% tax free proportion. Paula was insured in the fund for $1 million which was paid subsequent to her death. The fund had claimed a tax deduction for the premiums on the policy. Under the rules of the fund the proceeds of any insurance policy may be added to any death benefit at discretion of the trustee. As trustee, Ray exercised the discretion and added it to the pension. Any pension payable to Ray will be taxed on the taxable proportion as he and Paula were under age 60 at the time of Paula’s death.

As the superannuation fund had claimed a tax deduction for the premiums on the policy the amount received from the proceeds of the insurance policy would be treated as a taxable component. However, as it is permissible to add the insurance proceeds to a pension that is already in place then the proportions that applied at the commencement of the pension will continue. This means that the 80% taxable and 20% tax free proportion will continue despite the addition of the insurance component which notionally has a higher taxable component.

If Paula had decided to commence a non-reversionary pension the rules differ due to the changes to the superannuation legislation which were backdated to commence from 1 July 2012. As the pension ceased at the time of Paula’s death the proportions of 80% taxable and 20% tax free will remain with the balance of the pension. This means that the $400,000 being the balance of Paula’s pension account on death will consist of $320,000 taxable and $80,000 tax free amounts. As the proceeds of the insurance policy consist of a taxable component they will be added to the taxable amount. The effect will be to increase the taxable component to $1.32 million and the tax free amount of $80,000 will remain unchanged. Therefore the resulting taxable proportion will be approximately 94% and the tax free component will be approximately 6%. This means that any pension paid will have a greater taxable portion than if Paula had been paid a reversionary pension.

In this case, it would have been better for Paula to have commenced a reversionary pension and Ray receives it as a reversionary on her death. As a general rule, where the proceeds of an insurance policy are expected and will be added to a pension after the death of the original pensioner, a reversionary pension would appear to provide the best results from the point of view of the taxable and tax free proportions. This is relevant prior to both the original pensioner and the reversionary reaching age 60 and subsequently on the death of the reversionary pensioner if the residual amount of the reversionary pension is paid to a non-dependent child as defined for taxation purposes.

Benefits from the changes to the law for non-reversionary pensions

The main benefit arising from the amendment to the law which applies from 1 July 2012 is that trustees of superannuation funds that pay non-reversionary pensions now have greater flexibility to dispose of assets after the death of the pensioner and retain the tax exemption which applied to the pensioner prior to their death.

Similar treatment also applies to the calculation of the tax free and taxable components that applied to the non-reversionary pension. That is, the taxable and tax free proportions applying to the non-reversionary income stream will continue to apply to any lump sum or subsequent pension that arises from the pension assets at the time of death.

While this may sound relatively straightforward, care needs to be taken where amounts from anti-detriment payments or the proceeds of insurance policies are added to the superannuation income stream account. It may turn out in some cases that there may be a greater benefit provided in relation to the taxable and tax free components if a reversionary pension is payable and the proceeds of the insurance policy is added after the reversionary pension has commenced. The reason is that the proportioning rule is not re-calculated despite the fact that technically the proceeds from the insurance policy may include a relatively high taxable component. This, as always, depends on the circumstances of the particular case.

Graeme Colley is the Director Technical & Professional Standards at SPAA, the SMSF Professionals’ Association of Australia.

David Powell
August 27, 2013

Graeme thank you for 2 excellent articles on this subject.

SMSF's can avail themselves of significant equity when the threads of these division are bought together.

I've always hit the wall when it comes to the funding issues also. Predominantly because the minimum benefits of a member cannot be eroded.

Mostly I see wasted opportunities because deeds seem invariably to impute the life insurance benefit to the members account.

Creating flexibility for the trustee by NOT doing this goes a long way to helping solve liquidity.

Graeme Colley
August 26, 2013

Thanks for your comments Ramani

If the issue of cross-subsidisation is an issue then I think it should be straightened out. However, the main issue with SMSFs seems to be the funding of the anti-detriment payment.

An article on this would certainly seem worthwhile and could clear up a number of issues.



Ramani Venkatramani
August 23, 2013

Graeme has referred to anti-detriment payments in SMSFs and the use of reserves. I agree caution in not exceeding contribution limits through using reserves is warranted.

Apart from this any SMSF which has more than one member should be able to pay anti-detriment by using fund monies. Somehow a perception has risen that such cross-subsidisation (in a liquidity sense only, as the benefit is a claim on the ATO) is not permitted. In my view this is a particularly revenue-centric view that defeats the legislative intent.

We need more light thrown on this little known benefit which could be worth a lot to members. Happy to co-author a paper on this.


Leave a Comment:



SMSFs must fix death benefit pensions now

The merits of reversionary versus non-reversionary pensions

Keeping track of 'superannuation interest' is critical


Most viewed in recent weeks

How to enjoy your retirement

Amid thousands of comments, tips include developing interests to keep occupied, planning in advance to have enough money, staying connected with friends and communities ... should you defer retirement or just do it?

Results from our retirement experiences survey

Retirement is a good experience if you plan for it and manage your time, but freedom from money worries is key. Many retirees enjoy managing their money but SMSFs are not for everyone. Each retirement is different.

A tonic for turbulent times: my nine tips for investing

Investing is often portrayed as unapproachably complex. Can it be distilled into nine tips? An economist with 35 years of experience through numerous market cycles and events has given it a shot.

Rival standard for savings and incomes in retirement

A new standard argues the majority of Australians will never achieve the ASFA 'comfortable' level of retirement savings and it amounts to 'fearmongering' by vested interests. If comfortable is aspirational, so be it.

Dalio v Marks is common sense v uncommon sense

Billionaire fund manager standoff: Ray Dalio thinks investing is common sense and markets are simple, while Howard Marks says complex and convoluted 'second-level' thinking is needed for superior returns.

Fear is good if you are not part of the herd

If you feel fear when the market loses its head, you become part of the herd. Develop habits to embrace the fear. Identify the cause, decide if you need to take action and own the result without looking back. 

Latest Updates


The paradox of investment cycles

Now we're captivated by inflation and higher rates but only a year ago, investors were certain of the supremacy of US companies, the benign nature of inflation and the remoteness of tighter monetary policy.


Reporting Season will show cost control and pricing power

Companies have been slow to update guidance and we have yet to see the impact of inflation expectations in earnings and outlooks. Companies need to insulate costs from inflation while enjoying an uptick in revenue.


The early signals for August company earnings

Weaker share prices may have already discounted some bad news, but cost inflation is creating wide divergences inside and across sectors. Early results show some companies are strong enough to resist sector falls.


The compelling 20-year flight of SYD into private hands

In 2002, the share price of the company that became Sydney Airport (SYD) hit 80 cents from the $2 IPO price. After 20 years of astute investment driving revenue increases, it sold to private hands for $8.75 in 2022.

Investment strategies

Ethical investing responding to some short-term challenges

There are significant differences in the sector weightings of an ethical fund versus an index, and while this has caused some short-term headwinds recently, the tailwinds are expected to blow over the long term.

Investment strategies

If you are new to investing, avoid these 10 common mistakes

Many new investors make common mistakes while learning about markets. Losses are inevitable. Newbies should read more and develop a long-term focus while avoiding big mistakes and not aiming to be brilliant.

Investment strategies

RMBS today: rising rate-linked income with capital preservation

Lenders use Residential Mortgage-Backed Securities to finance mortgages and RMBS are available to retail investors through fund structures. They come with many layers of protection beyond movements in house prices. 



© 2022 Morningstar, Inc. All rights reserved.

The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.