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Self Managed Super Fund (SMSF) Article
Transferring the reversionary pension
By Tony Negline.
This article may be out of date.
28th April 2010
This week we continue our series of articles about certain types of pension transactions. Thus far we've looked at "rolling back", rolling over, "refreshing" and cashing a lump sum of money out of a pension.
This week we're going to look at transferring account based reversionary pensions including Transition to Retirement pensions.
This transaction involves transferring a pension to a reversionary beneficiary on the death of a primary pensioner. The automatic reversion pension option is the continuation of the current pension and not its termination and commencement of a new pension.
This transaction is different to the situation where a super fund trustee applies a deceased member's account balance to purchase a new pension either because of that member's death benefit nomination or because a trustee has used a power in their trust deed to pay a death benefit as a pension benefit.
As an existing pension is continuing there is no need to ensure that the pro-rata minimum pension has been paid to the date of transfer to the reversionary.
Equally the account balance is not deemed to be rolled over or a contribution deemed to be made for the reversionary.
The minimum pension amount calculated for the primary pensioner prior to death also applies to the reversionary in the financial year that the transfer takes place. That is, the minimum pension amount is not restruck. However at the commencement of the next financial year the minimum income amount will be calculated using the reversionary's age.
If the pension had been a Transition to Retirement pension in the hands of the deceased member then upon transfer to the reversionary it will become an account based pension.
This occurs because the member has satisfied a Condition of Release which allows full and immediate access to all Preserved and Restricted Non-preserved Benefits.
In some situations the super and tax laws will not allow the reversionary to take the pension as an income stream benefit but only as a lump sum. This will probably arise if the reversionary person is an adult child of the deceased member. Some adult children can be dependants, and can receive a death benefit pension, if they suffer from certain types of physical or mental ill health.
If the reversionary is a child under 25 then the pension can be paid but must cease at that age. If the pension still has an account balance then it can be paid out tax-free at that time. If the child suffers from certain types of physical or mental ill health then these pension payments may continue to be paid after the child reaches age 25.
As noted the transfer is not a rollover. Further the original pension is not deemed to have been commuted – that is, stopped. Consequently the tax-free percentage of each pension payment will not change.
Pension payments will be tax-free if the deceased died when they were at least age 60 or the reversionary was at least that age.
In all other cases pension payments will be subject to tax but will be paid with a 15% rebate. In these situations the super fund will need to become registered for PAYG withholding. Once the reversionary reaches the age of 60 then pension payments will be tax-free.
From the financial services law point of view the transfer of the pension is not the purchase of a financial product but the normal operation of a specific product.
However the reversionary pension does represent issuing a financial product to the reversionary. A Product Disclosure Statement will not have to be issued at the time of transfer (but must be issued within 3 months of transfer) and the reversionary does not need to provide an application to join the super fund.
The trustee must note the death of the member, confirm the nominated reversionary is still alive and is not prevented from receiving the pension as income payments. The trustee should also note that the tax-free percentage doesn't change.
If the pension is a Transition to Retirement pension then the trustee will need to record that the pension's Preserved Benefits can now be released. This will mean the pension no longer has a 10% income maximum.
A seven step process is used to implement transferring a pension to a reversionary:
- Note the death of the primary pensioner
- Note the pension is reversionary and the nominated individual is eligible to receive these benefits as a pension
- Confirm that the pension will be transferred to reversionary beneficiary on and from death of primary pensioner
- No re-striking of pension limits, no pro-rata income payment and no change in tax-free percentages
- The whole account balance can be paid as lump sum if the pension was a Transition to Retirement pension
- No need for trustee to change asset segregation if this has been used
- If the reversionary pensioner is not already a trustee of the fund then they will need to become one; they will need to complete the ATO's trustee declaration and if individual trustees are used then a new trustee may cause official ownership of assets to change
This email is general in nature only and does not constitute or convey specific or professional advice. Legislation changes may occur quickly. Formal advice should be sought before acting in any of the areas discussed. Be aware that the information in these articles may become innaccurate with time. Responsibility is disclaimed for any inaccuracies, errors or omissions. Particular investments are neither invited nor recommended and hence this publication is not "financial product advice" as defined in Section 766B of the above legislation. All expressions of opinion by contributors are published on the basis that they are not to be regarded as expressing the official opinion of any other person or entity unless expressly stated. No responsibility for the accuracy of the opinions or information contained in the contributor's articles is accepted by any other person or entity. Copyright: This publication is copyright. If you wish to reproduce this article you require a license, which can be purchased here, to do so.