Reversionary beneficiary nominations
- Posted by Palladium Wealth Partners
- On March 11, 2020
- 0 Comments
Ensuring your affairs are in order before your passing is an integral part of estate planning. Given this, it’s vital to understand that your super death benefit isn’t necessarily distributed via your will.
For example, your super death benefit may be paid to your legal personal representative (the executor or administrator of your estate) when:
1. You elect your legal personal representative through a super death benefit nomination.
2. The trustee of your super fund, under certain circumstances, uses their discretion to pay it to your legal personal representative.
3. You have not made a super death benefit nomination, and the trust deed for your super fund stipulates that in the event you have made no nomination, benefits are to be paid to your legal personal representative.
Whether you wish your super death benefit to be paid to your estate, directly to your dependants, or as a blend of both, it’s important that your super death benefit nomination is valid, up-to-date, and reflects your wishes.
There are several types of super death benefit nominations. You may be familiar with the following two:
- A non-binding nomination. This advises the trustee of your super fund on whom you would like to receive your super death benefit. Yet, the trustee can use their discretion in deciding where it’s paid.
- A binding nomination. This binds the trustee of your super fund. Your super death benefit is paid as you instruct, if the nomination is valid. The nomination may need to be updated every three years.
These two types of nominations can be used in both the retirement phase and the accumulation phase.
However, there is another type of nomination, a reversionary nomination, which is available on income streams.
Reversionary beneficiary nominations
Upon commencing a retirement income stream, such as an account-based pension or a transition to retirement (TTR) pension, your super fund may give you the option to nominate a reversionary beneficiary.
This type of nomination can often provide certainty around the who, and the how. Namely, whom you would like to receive your super death benefit, and how you would like it to be paid to them, upon your passing.
With a valid reversionary nomination, upon your passing, the retirement income stream continues as a reversionary death benefit income stream. And, the reversionary beneficiary receives the pension payments; with minimal interruption, which may ease the difficult time after your passing, by assisting them financially and reducing their administrative burden.
Importantly, we say valid because there are specific requirements for a reversionary nomination to be deemed valid. These requirements can be stricter than the ones that apply to the other two types of nominations.
For a reversionary nomination to be deemed valid, you can nominate only one beneficiary. And, the nominated beneficiary can only be an eligible pension recipient dependant, such as:
- your spouse,
- your child under 18 years of age,
- your financially dependent child who is under 25,
- your child who is disabled, irrespective of their age, or
- a person who is in an interdependency relationship with you.
Once made, a reversionary nomination may not be able to be changed. To nominate a new reversionary beneficiary, you may be required to commute the retirement income stream, and commence a new one. However, this may have unintended consequences, for example, for social security purposes.
This can be especially relevant if your personal circumstances were to change in the future, and the person that you had nominated as a reversionary beneficiary was no longer an eligible pension recipient dependant.
Importantly, if a reversionary nomination is invalid, the trustee of your super fund will consider any non-binding or binding nominations that you have made before paying a lump sum death benefit and/or a new death benefit income stream. However, if there are no nominations, the trustee can use their discretion.
One of the benefits of a reversionary nomination is that it can enable your super death benefit to remain within the tax-effective environment of super – instead of, for example, being paid out as a lump sum.
If you or the reversionary beneficiary are aged 60 years or over at the time of your passing, the pension payments from the reversionary death benefit income stream are tax-free.
Whereas, if both you and the reversionary beneficiary are under 60 at the time of your passing, the pension payments from the reversionary death benefit income stream are taxed as follows:
- the tax-free component is tax-free, and
- the taxable (taxed element) component is taxed at marginal tax rate plus Medicare Levy, less 15% offset.
However, when the reversionary beneficiary turns 60, the pension payments from the reversionary death benefit income stream are tax free.
Lastly, investment income and capital gains from the assets supporting the reversionary death benefit income stream are exempt from tax, noting that your reversionary beneficiary can only retain retirement phase income streams up to their transfer balance cap (TBC).
Other important considerations
- The TBC and the reversionary beneficiary (your spouse, for example).
- The receipt of a reversionary death benefit income stream is an event that will cause a credit in the transfer balance account of the reversionary beneficiary.
- A breach of the TBC can lead to excess transfer balance tax, and the excess (and associated earnings) must be cashed out or transferred back to accumulation phase. However, it must be noted that there can be time for the reversionary beneficiary to arrange their affairs, if required.
- For example, for a reversionary death benefit income stream that commenced on or after 1 July 2017, the credit occurs 12 months from the date of your passing. And, the value of the credit is determined as the value at the time of your passing.
- As a TTR pension moves to retirement phase upon reversion, the reversionary beneficiary not only receives tax-advantaged payments, but also begins to benefit from tax-exempt earnings from the supporting assets.
Ensuring your affairs are in order prior to your passing is an integral part of estate planning. This is especially the case when it comes to your super death benefit, and making or updating a super death benefit nomination.
However, prior to doing so, it’s important to appropriately consider, for example, any potential financial, social security, taxation and estate planning implications. Seeking professional advice can help in this regard.
If you have any questions regarding this article, please do not hesitate to contact us.