Can Non-Reversionary Pensions be made Reversionary?
If a pension commences as a non-reversionary pension can that pension be made reversionary without stopping and restarting the pension? The answer is a simple and definite “Yes” if the pension is an account style pension (such as account based pensions and transition to retirement pensions) and the governing rules expressly permit pensions to be varied.
Many pensions are issued without much thought given to whether the pension should be reversionary. However, there are two significant advantages to a pension being reversionary: namely.
The ease of transfer of the pension on the death of the primary pensioner – the pension simply “transfers” to the reversionary beneficiary – without recalculation of the pension payment amount and without need to strike the pension balance as at the date of death of the primary beneficiary.
This transfer could be made seamless if the pension payments are made to the joint account of the primary beneficiary and the reversionary beneficiary.
There is no immediate need for trustee action and decision making as there is no need to first determine whether the primary beneficiary made a binding death benefit nomination; whether that nomination can be located and finally, whether the nomination is valid. This assumes that the reversionary beneficiary is the spouse of the primary beneficiary. However, the trustee could subsequently note the transfer of the pension to the reversionary beneficiary.
How to make an existing pension to be reversionary?
This is achieved by varying the current terms of the pension by the agreement between the trustees and the member. The trust deed/governing rules of the superannuation fund must expressly empower the trustee to vary the terms of the pension to make the pension reversionary. Fortunately, the SUPERCentral Governing Rules expressly permits the trustee (with the consent of the member) to vary a pension so the pension is reversionary. The Townsends Superannuation Governing Rules also permit the trustee (with the consent of the member) to vary the pension so that the pension is reversionary.
Additionally, the current terms of the pension must not prohibit the variation of the terms of the pension.
Are there any adverse consequences to making the pension reversionary?
There can be adverse consequences.
If the pension has the status of an asset test exemption for Centrelink purposes, then the variation could entail loss of that status. This will be an issue for defined benefit pensions and market linked pensions.
Also, if the pension commenced before 1 January 2015 – the pension may have “grandfathered status” and would not be assessed for the Centrelink income means test as a financial asset – this grandfathered status means that it is assessed for income means test purposes under the “undeducted purchase price” method which is generally more beneficial to the member and this could be jeopardised by the variation of the pension.
How are the terms varied to make the pension reversionary?
This will require a formal document to be prepared and signed by both the trustees and the primary beneficiary. This formality is required to evidence the consent of both parties to the variation, and as evidence of the change to third parties such as the fund auditor and the ATO.
Does the ATO or Centrelink need to be advised if the pension is varied to be made reversionary?
The variation of the pension to be reversionary is not required to be notified to the ATO.
Assuming the pension is not an asset test exempt pension or a pre-1 January 2025 pension there is no obligation to notify Centrelink of the change.
No notifications are required as the variation of the pension has no impact on the pension account balance or the amount of pension payments.
Is a Binding Death Benefit Nomination still required?
A binding death nomination is still required even if the pension is varied to be reversionary for a number of reasons.
Firstly, the nominated reversionary beneficiary may predecease the member. In this case the binding death benefit nomination will apply to the remaining pension account balance.
Secondly, the nominated reversionary beneficiary may cease to be a dependant of the member – due to divorce.
Thirdly, the member may have other superannuation interests in the superannuation fund. The member may have an accumulation interest or other pension interests. The binding death benefit nomination will apply to other superannuation interests in the fund.
Must all pensions of the member be reversionary?
The member can pick and choose which pensions are to be made reversionary. Some pensions could be reversionary while other pensions could be governed by the terms of the binding death benefit nomination.
Is the consent of the reversionary beneficiary required to make the pension reversionary?
Strictly, no. The reversionary beneficiary could be unware that they have been made the reversionary beneficiary and the individual is not obliged to accept the transfer of the pension. The nominated reversionary beneficiary can decline the transfer of the pension (in the same way that a beneficiary of an estate can decline to accept a legacy from the estate). If the nominated reversionary beneficiary wishes to decline the transfer of the pension the beneficiary must do so within a reasonable time of becoming aware of the nomination and the beneficiary must decline the nomination in its entirety.
Switching from a non-reversionary pension to a reversionary pension may be possible, but it requires careful consideration of superannuation rules and potential tax implications. If you'd like more information on how this could affect your retirement income stream, please give us a call or book a time to visit us at our Adelaide Based Offices.
General Advice Warning:The information on this website is intended to be general in nature and is not personal financial product advice. It does not take into account your objectives, financial situation or needs. Before acting on any information, you should consider the appropriateness of the information provided and the nature of the relevant financial product having regard to your objectives, financial situation and needs. In particular, you should seek independent financial advice and read the relevant product disclosure statement (PDS) or other offer document prior to making an investment decision in relation to a financial product.