A reversionary pension is a type of income stream from superannuation that continues to be paid to a nominated dependant after the original pensioner’s death. Instead of stopping, the pension “reverts” to the nominated beneficiary, usually a spouse or partner. This provides ongoing financial support without the need for the trustee to decide how benefits are distributed.
Reversionary pensions give certainty and continuity in retirement planning, ensuring income continues smoothly for dependants.
Advanced
From a technical perspective, a reversionary pension must be established at the time the pension is first set up. The nominated beneficiary must meet superannuation law’s definition of a dependant, such as a spouse, child under 18 (or under 25 if financially dependent), or someone in an interdependent relationship.
Tax treatment depends on the beneficiary’s age and relationship to the deceased. For example, adult children generally cannot receive a reversionary pension unless financially dependent. Importantly, the reversionary pension counts toward the beneficiary’s transfer balance cap, but they usually have 12 months after commencement to manage any cap issues. This makes reversionary pensions a key consideration in estate and retirement planning.
Relevance
- Provides ongoing income for dependants after death of the pensioner
- Reduces uncertainty by removing trustee discretion in death benefit distribution
- Plays a significant role in retirement and estate planning strategies
Applications
- Ensuring a spouse continues to receive regular pension income
- Supporting dependent children after the death of a parent
- Simplifying estate planning by providing automatic benefit transfer
- Managing superannuation death benefits in a tax-effective manner
Metrics
- Pension amount continuing to beneficiary after death
- Impact on beneficiary’s transfer balance cap
- Tax treatment based on beneficiary’s age and dependency status
- Number of retirees establishing pensions with reversionary status
Issues
- Must be nominated at pension commencement, limiting flexibility later
- May create transfer balance cap issues for the beneficiary
- Restricted beneficiary eligibility under superannuation law
- Overlooking reversionary status can cause disputes or delays in benefit distribution
Example
A retiree establishes an account-based pension with a reversionary nomination to their spouse. When the retiree passes away, the pension continues to the spouse automatically, ensuring uninterrupted retirement income.
