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