Reversionary pensions: What they are and how they work

When you start a super income stream (such as an account-based pension), most super funds give you the option to nominate a beneficiary who will automatically receive your super pension when you die.

Although this doesn’t sound like a major decision, it can be a valuable estate planning tool to ensure your super goes to the person you want with the minimum fuss. It can be particularly important if your pension is being paid by your SMSF.

A reversionary pension is also a simple way to make things easier for your spouse when you die. Minimal paperwork is required before pension payments can continue and the income stream’s value won’t be counted under their transfer balance cap for 12 months, taking away some of the challenges and decisions at this difficult time.

1. What is a reversionary pension?

If you are receiving an income stream (pension) from your super and you have not nominated a reversionary beneficiary, it stops as soon as you die and the remaining balance (for account-based pensions) or lump sum value (for non-account based pensions such as lifetime annuities) is distributed to your beneficiaries. This distribution is made in line with any binding nomination that is in effect or to the individual(s) decided by the fund’s trustee if there is no binding nomination.

As an alternative to this, most super funds and annuity providers allow you to nominate a reversionary beneficiary who becomes entitled to continue your super pension on your death. A reversionary nomination makes your wishes clear to the trustee of your super fund, is binding, and does not expire.

With a reversionary pension, your existing super pension continues to be paid, but it reverts to your beneficiary. Provided your intended beneficiary is an eligible pension dependant at the time of your death, they will start receiving your pension quickly. 

Minimal documentation, most commonly a death certificate and marriage certificate, is required before the pension can revert. If your reversionary beneficiary is not your spouse, other evidence of their relationship to you will be required.

Once the reversion is confirmed, the pension belongs to your beneficiary and they have all the same powers you had to make changes to and withdrawals from the product, except the option to move back into the accumulation phase of super. This is because death benefits are subject to compulsory cashing rules and must be kept in a product that makes regular payments or be withdrawn from the super system. 

2. Who can receive a reversionary pension?

For a reversionary pension nomination to be valid, only someone classed as your death benefit dependant and eligible to receive death benefits as a pension under superannuation law can be nominated. You may only nominate one reversionary beneficiary at a time – it is not possible to nominate multiple people to split your pension.

This means at the date of your death your reversionary beneficiary must be:

• Your spouse (de-facto or married, including same sex)
• Your child under age 18
• Your child aged between 18 and 25 who is financially dependent on you immediately before your death
• Your child of any age who is permanently disabled as defined in the Disability Services Act 1986
• Someone who is financially dependent on you 
• Someone with whom you are in an interdependency relationship both at the time of nomination and the time of your death. (An interdependency relationship involves someone who lives with you and shares a close personal relationship where one or both of you provide for the financial and domestic support and personal care of the other.)

If your pension reverts to a child who is not disabled, the remaining value must be cashed as a lump sum when the child turns 25.

3. How to make your nomination

For account-based pensions

Legally, you can nominate or change your reversionary beneficiary at any time, but your fund’s trust deed may require the nomination to be made when you first open your pension account. If you have an SMSF, check your deed for the specifics and consider updating it if you need more flexibility.

If you have already started a pension without a reversionary beneficiary and your fund does not allow nominations to be added to existing accounts, you can consider transferring your balance into the accumulation phase and then starting a new pension. This will permit you to make a reversionary nomination for your new account.

For annuities and lifetime pensions

Any reversionary nomination must be made when the income stream starts. When you purchase an annuity or lifetime pension, the provider’s application forms will allow you to make your nomination. Usually, the beneficiary can only be your spouse. This is because the provider is agreeing to pay income for life to you and your spouse if you nominate them. If income for life was to be paid to a child or other beneficiary, who is expected to live much longer, the annual income payment that could be provided would be very low since your lump sum investment would be spread over many more years.

If you are entitled to a defined benefit pension from your super fund, the trust deed generally specifies how and to whom any reversionary pension will be paid, and you are not permitted to make an alternative nomination. For example, some funds may pay two-thirds of the original pension to your spouse until their death.

4. Reversionary pensions and the Transfer Balance Cap

There is a cap on the amount you can transfer and hold tax free in the retirement or pension phase. The current standard cap is $1.9 million.

This cap also applies to reversionary pensions, so if a beneficiary becomes entitled to this type of pension, they need to ensure it does not take their retirement phase super assets over their cap. Note that everyone who has previously commenced a pension has their own personal cap, which is often different from the standard cap that applies to those starting a pension for the first time. You can see your personal transfer balance cap (TBC) via myGov through the linked ATO service. If a child will be receiving the reversionary pension, modified TBC rules apply.

To allow reversionary beneficiaries time to get their super assets in order and avoid breaching their TBC, the value of a reversionary pension is not added to the beneficiary’s transfer balance account until 12 months after the fund member’s death. 

The amount that is added to the recipient’s transfer balance account is determined based on the type of pension, as shown below: 

• Account-based pensions – the balance of the account on the date of death
• Annuity – the commutation value on the date of death (amount that could be cashed as a lump sum)
• Capped defined benefit – the special value, defined as 16 times the annual payment the beneficiary is entitled to at the date of death.

Some beneficiaries may need to take action to avoid exceeding their cap. This could be:

• Commuting some of their own pension back to accumulation phase
• Cashing a portion as a lump sum to make ‘space’ for the addition of the reversionary pension, or
• Choosing to commute some or all of the reversionary pension to a lump sum.

The 12-month delay before reversionary pensions affect the recipient’s transfer balance cap is a key advantage of this type of beneficiary nomination. If a beneficiary is not nominated as a reversionary recipient but chooses to take death benefits as an income stream, then the value is instead added to their transfer balance account immediately when the income stream starts.

5. Reversionary pension vs binding death benefit nomination

One of the benefits of a reversionary pension is the automatic nature of the change in recipient, with the fund trustee not required to make a decision about the benefit other than confirming your nomination. A binding death benefit nomination (BDBN) on the other hand, involves stopping the current super pension. The fund trustee must then decide whether to start a new pension for the nominated beneficiary or pay a lump sum, usually by asking them what they prefer.

In addition, reversionary pensions are rarely challenged by other potential beneficiaries and most legal experts see them as taking precedence over a BDBN. 

BDBNs are sometimes challenged in court and if they are not executed properly (such as being witnessed correctly), they can be overturned in favour of other beneficiaries.

6. Tax on death benefit pensions

Death benefit income streams are taxed in the same way regardless of whether the recipient was a reversionary beneficiary or actively chose to take the death benefit as a pension/income stream.

The rate of tax varies based on the age of the deceased and the recipient and the tax components that make up the payment

Any tax-free component is always paid tax free.

The taxed element of any taxable component is tax free if the deceased reached age 60 prior to their death and/or the recipient is aged 60 or more. If the pension is a capped defined benefit, tax applies to 50% of any income above the defined benefit income cap ($118,750 in 2024–25) at marginal rates. If both the deceased and the recipient are under age 60, marginal rates of tax apply with a 15% tax offset. 

The untaxed element of any taxable component attracts marginal tax rates with a 10% offset if the deceased reached age 60 prior to their death and/or the recipient is aged 60 or more. If both the deceased and recipient are under age 60, marginal tax rates apply with no offset.

Your super fund can tell you the tax components that make up your benefit.

7. SMSFs and reversionary pensions

Reversionary pensions can be an important estate planning tool when used in conjunction with an SMSF. It provides certainty that payment of your existing super pension will automatically revert to your desired beneficiary, without the fund trustee having any input into the decision.

It’s important to note, however, that not all SMSF trust deeds provide for a reversionary pension option or give trustees the necessary powers to pay this type of super pension. You need to carefully check the wording of the current trust deed and governing rules of your fund to determine what options are permitted when it comes to the payment of death benefits and whether you can nominate a reversionary beneficiary.

Another detail to check is whether a reversionary pension nomination will be given priority over a BDBN by the fund trustee, as not all SMSF trust deeds and governing rules make this explicit. A good trust deed should ensure your reversionary death benefit nomination is valid, effective and cannot be ignored or overruled by the fund trustee after your death.

8. What if your reversionary pensioner dies or the relationship changes?

If the person you have nominated as your reversionary beneficiary dies or your relationship changes, such as if you separate or divorce, they can no longer continue your pension after you pass away.

In this situation you can cancel your reversionary nomination and choose an alternative beneficiary. If there is another person who qualifies to receive a reversionary pension, you may choose to make a new reversionary nomination if you wish. As described previously, you may need to close your existing pension and start a new one to make this possible. Alternatively, you can make a binding or non-binding nomination in favour of any person eligible to receive your super death benefits or your Legal Personal Representative who will distribute your estate according to your will.

If the person you have nominated as a reversionary beneficiary is not eligible to receive your death benefit as a pension at the time of your death, then the nomination cannot be followed. If you have an alternative binding nomination, the trustee will pay your benefit as instructed in that nomination. If you do not have an alternative binding nomination, the trustee will decide the most appropriate distribution of your benefit according to your personal circumstances.