The Reversionary Pension Versus Non-Reversionary Pension

When an individual becomes eligible to receive a pension from a superfund, they can designate a reversionary pensioner, with the assistance of retirement planners, if they wish to do so.

So what is a reversionary pension?

Reversionary Pension

A reversionary pension is an income stream superannuation benefit paid to a member. The pension will be paid to a nominated reversionary beneficiary upon the member’s death. The pension does not cease upon the death of the original pensioner but continues to be paid to the reversionary pensioner as though the reversionary pensioner was the original pensioner.

Non-Reversionary Pension

A non-reversionary pension is an income stream superannuation benefit paid to a member which ceases upon the member’s death. The pension ceases, and the member’s superannuation account balance must be paid out of the superfund as a lump sum, although in some circumstances, a new pension can be commenced.

Reversionary beneficiaries

Only dependants can be nominated as reversionary beneficiaries. A dependant includes:

  1. A spouse
  2. A child under 18
  3. A child 18 to 24 who is financially dependant on the deceased
  4. A child over 18 who is disabled

Advantages of a Reversionary Pension

The main advantage used to be to ensure the tax-free status of a fund paying a pension was continued. However, from 1 July 2012, this exemption remains regardless of whether there is a reversionary pension as long as a death benefit is paid as soon as practical.

There are also other benefits:

  1. Insurance proceeds – retain their tax-free and taxable components of the reversionary pension, whereas they are added to the taxable component for a non-reversionary pension. This can be important for death benefit payments to non-dependants (e.g. adult children).
  2. Social security – reversionary pensions commenced before 1 January 2015 can receive some concessional treatment for social security assessment purposes.
  3. Estate security – the trustee of the superfund is not required to decide who should receive the death benefit, as the pension will revert to the nominated beneficiary.

Disadvantages of a Reversionary Pension

 A significant disadvantage in receiving a reversionary pension is when a member divorces or separates from the beneficiary. In this event, the member must commute (cease) the pension and start a new one.

As always, if you have any more questions about pensions or reversionary pensions, please get in touch with your client manager.

Kreston Stanley Williamson Team

*Correct as of March 2016

Disclaimer – Kreston Stanley Williamson has produced this article to serve its clients and associates. The information contained in the article is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas in this article, you must seek advice about your circumstances. Liability is limited by a scheme approved under professional standards legislation.

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