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Self Managed Super Fund (SMSF) Article
Nominating or changing the reversionary beneficiary
By Tony Negline.
This article may be out of date.
12th May 2010
This week we conclude our series of articles about certain types of pension transactions. Thus far we've looked at "rolling back", rolling over, "refreshing", cashing a lump sum out of a pension and transferring a pension to the nominated reversionary pensioner.
This week we're going to look at changing a reversionary pensioner for account based pensions and Transition to Retirement pensions.
On the death of a pensioner member the nominated reversionary begins to automatically receive income payments from the deceased's pension. One potential purpose of nominating a reversionary is to remove any discretion for the payment of a death benefit by a super fund's trustee.
Changing the nominated reversionary involves a series of steps to vary the named reversionary pensioner. Similar processes have to take place to alter a non-reversionary pension so that it becomes a reversionary pension.
The named reversionary beneficiary has to change if they have pre-deceased the super investor or they are no longer the spouse of the super investor. It might also occur to better reflect the changing personal circumstances of the super investor or their dependants.
There are two alternative ways for a super fund trustee to action this transaction. Firstly, the change might occur because the pension's terms and conditions specifically permit it. Secondly, it could occur via the mutual agreement between the trustee and the super fund member.
Who can be a reversionary? This cannot be anybody. A super fund's trust deed probably restricts who it can be. The super laws limit the reversionary to being a dependant of the member. Under these laws a dependant includes a member's spouse and children. However another super law says that a super fund's independent adult children cannot be a reversionary pensioner.
Could a former reversionary pensioner challenge their lost status? The new reversionary is not a member of the super fund because they are a reversionary. In general this means the reversionary will have no standing and therefore cannot challenge the change.
In some cases the super fund member might have a binding agreement with a reversionary beneficiary prohibiting this type of change. One example is binding financial arrangements made prior to or during a marriage. Another example is super splitting agreements put in place as part of formal divorce settlements.
Changing the nominated reversionary does not alter the overall structure of the pension. This means there is no need to ensure that the pro-rata minimum pension has been paid before the variation takes place.
Equally the minimum pension amount continues to apply and is not recalculated after the new reversionary has been nominated.
The preservation status of the pension also remains unchanged. This is especially important for Transition to Retirement pensions.
As may seem obvious, after the new reversionary has been installed into this position, the original pension will not have been rolled over anywhere. 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. However, if relevant, Centrelink will have to be informed about the change in the reversionary and a new income test assessment may be calculated from the date of the change.
From the financial services law point of view the variation to the new reversionary is not the purchase or issuance of a financial product but the normal operation of a specific product.
(If the new reversionary begins to receive pension payments because of the death of the pensioner then this will 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.)
From a financial advice perspective, if a licensed financial adviser has recommended the transaction then they should issue a Statement of Advice and detail why changing the nominated reversionary is an appropriate course of action as well as all the costs involved.
On the death of the pensioner 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 six step process is used to implement changing the nominated reversionary:
- The trustee and the member mutually agree the variation
- The trustee revises the pension's terms
- The member provides information about the new reversionary beneficiary (identity, relationship to member, date of birth, etc)
- The trustee issues a document advising of a change and the implications of the change
- The member confirms that they would like the change to proceed
- The trustee finalizes the matter and issues revised pension documentation and forwards it to all interest parties including Centrelink if necessary
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.