Reversionary beneficiaries — key concepts for SMSF members and trustees

The Cleardocs SMSF Pension Pack allows a member commencing a pension to nominate a reversionary beneficiary from the beginning of the pension or at a later time using a death benefit notice.

This article revisits some key concepts in deciding whether to, and how to properly, nominate a reversionary beneficiary where Cleardocs documents are in place.

Reversionary beneficiaries: the Cleardocs position

Under the Pension Payment Agreement, a 'reversionary beneficiary' is the person who will continue to receive a member's pension when the member dies (subject to an important qualification below).

The SMSF trustee may only pay the pension to a reversionary beneficiary if the person is a 'pension dependant' (explained below) of the deceased member.

There can be tax or social security benefit implications in a pension 'reverting' to a beneficiary rather than the pension ceasing and a lump sum benefit being paid or cashing the member's pension to purchase a new income stream.

How to appoint a reversionary beneficiary — when commencing a pension

Under the Pension Payment Agreement, a member can appoint a reversionary beneficiary when he or she commences the pension by selecting "Yes" to the question "Does the member want to nominate a reversionary beneficiary from the beginning?".

If this option is selected, the reversionary beneficiary will be named in the schedule to the member's Pension Payment Agreement.

How to appoint a reversionary beneficiary — after the pension has commenced

Once the member has commenced receiving the pension - the member may nominate a reversionary beneficiary, by giving the trustee a notice:

• naming one of the member's dependants;
• specifying that that dependant is to receive the member's account balance when the member dies; and
• specifying that the dependant is to receive the account as a pension,

so long as the notice fulfils legal requirements.^[1]

Alternatively, the Pension Payment Agreement can be amended to include a nominated reversionary beneficiary by the trustee and the member receiving the pension signing a document varying the terms of the pension.

Who can be a reversionary beneficiary

As noted above, a trustee may not pay a pension to a person nominated as a reversionary beneficiary unless that person is a 'pension dependant'. Consequently, the only persons who should be nominated as a reversionary beneficiary are those persons who are expected to be 'pension dependants' at the date of death of the member.

The meaning of a 'pension dependant' is best understood by first considering the meaning of 'dependant' and then adding the meaning of 'pension dependant'. Here goes.^[2]

To be classified as 'dependant' under section 10 of the Superannuation Industry (Supervision) Act 1993 (SISA), the person must be in an 'interdependency relationship' with the member, or be the member's spouse or child. Two people, whether related or not, are treated as being in an 'interdependency relationship' if:

• they have a close personal relationship;
• they live together;
• one or each of them provides the other with financial support; and
• one or each of them provides the other with domestic support and personal care.

To be classified as a 'pension dependant' and as a result be entitled to receive a pension on the death of a member, you must not only be a 'dependant' but also, in the case of a 'dependant' who is a child of the deceased, be:

• less than 18 years of age; or
• be 18 or more years of age and less than 25 years of age and be financially dependent on the member; or
• have a disability of the kind described in subsection 8(1) of the Disability Services Act 1986.

Common issue 1 — reversionary beneficiary not a pension dependant

If, at the time of the member's death, the reversionary beneficiary is not a 'pension dependant' the trustee must instead pay the member's benefits in accordance with any valid Death Benefit Agreement or Death Benefit Nomination the member had in place.

If the member does not have any valid Death Benefit Agreement or Death Benefit Nomination in place, the trustee may pay or apply the member's benefit generally at the trustee's discretion, subject to certain rules set out in the SMSF deed and superannuation law.

The trustee will always be limited to paying or applying a member's benefits as a lump sum where the benefit is being paid to a person who is not a 'pension dependant' at the time of the member's death.

Common issue 2 — what if the nominated reversionary beneficiary dies before the member

If the member's nominated reversionary beneficiary dies before the member, then the trustee will be in the same position as if the reversionary beneficiary was not a 'pension dependant' and any valid Death Benefit Agreement or Death Benefit Nomination will apply.

Common issue 3 — what happens when there is a reversionary beneficiary under the pension and Death Benefit Agreements or Death Benefit Nominations?

If a reversionary beneficiary is nominated in accordance with the terms of the pension (see above for valid nominations) and is a 'pension dependant', the trustee must pay the member's pension to the reversionary beneficiary and any Death Benefit Agreement or Death Benefit Nomination is of no effect.

Where the member has both a Death Benefit Agreement and a binding Death Benefit Nomination in place, the Death Benefit Agreement prevails.

The above principles apply to the pension being paid to the member. Any Death Benefit Agreement or Death Benefit Nomination will also be relevant in respect of any part of the member's account balance which is not supporting the pension that 'reverts'.

More information from Maddocks

For more information, please contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Commercial team.

More Cleardocs information on related topics

You can read earlier ClearLaw articles on a wide range of SMSF topics.

Order Cleardocs related document packages

• Set up an SMSF
• SMSF set up + register corporate trustee
• Update an SMSF deed
• Set up an SMSF pension
• Create an SMSF Investment Strategy
• Arrange SMSF borrowing documents
  • for when the lender is a bank
  • for when the lender is a related party
• SMSF Death Benefit Nomination — binding or non binding
• SMSF Death Benefit Agreement — binding and permanent
• SMSF Minutes & Resolutions Package