The Importance of a Reversionary Pension in Succession Planning

What is a Reversionary Pension?

One means of trying to provide more certainty on where a member’s superannuation benefits end up upon their death is a Binding Death Benefit Nomination. Another tool available is through the implementation of an Automatically Reversionary Pension (ARP).

When the member of a superannuation fund passes away the trustee(s) of the fund must deal with the member’s benefits as soon as practicable. The choices available include paying a death benefit pension or lump sum to a dependant (as per the Superannuation Industry (Supervision) Act 1993) or a combination of both.

Normally a pension ceases as soon as a member dies but if a dependant beneficiary of the deceased is automatically entitled to receive the pension upon the member’s death (via the appropriate documentation) the superannuation pension continues.

An ARP is a pension that must be paid to a nominated beneficiary without any exercise of discretion by the fund trustee(s).

Therefore if a member passes away and an ARP is not in place, the fund trustee(s) can generally exercise some level of discretion in relation to the recipients of the deceased member’s superannuation benefits (subject to the governing rules of the fund and the existence of a valid Binding Death Benefit Nomination). However such benefits must still be paid to the deceased member’s dependants and/or the executor of their estate. If an ARP is in place, the pension would revert automatically (eg. to the surviving spouse) and would not automatically form part of the deceased member’s estate

What else should you know?

Some other relevant points about ARP’s;

• A condition of release must be met for an ARP to be commenced
• An ARP is generally not able to be paid to a dependant child aged 25 years or more
• As the pension does not cease upon death of the member any pension exemption for the fund continues (subject to the recipient beneficiary’s transfer balance cap); and
• For reversionary pensions that commence on or after 1 July 2017, the value of the pension at date of death will be recorded in the surviving members transfer balance account 12 months after the date the reversionary pension commenced. This delay in recording of value should allow enough time for the reversionary pensioner to seek professional advice and make decisions around issues like the $1.6 million transfer balance cap.

As is the case with any planning strategies, a solid foundation of rules governing the superannuation fund and related documents are imperative in ensuring a member’s chosen succession plans are legally effective and tax efficient.

There are many factors that need to be considered in deciding whether or not to implement an ARP and the above is only a snippet so professional advice should always be sought on this front.

It is so important to set up your estate and superannuation plans in the correct way, so make sure you speak to an experienced business adviser prior to finalising these.

Make a difficult situation easier. Receive detailed advice tailored for you by speaking to the team at BLG Business Advisers. Get in touch online or call (02) 4229 2211.

*This information is correct at the time of publishing and subject to change.*