David Busoli, principal of SMSF Alliance, said there is often confusion about the way a reversionary pension is treated relative to various caps and trigger points in the legislation including the minimum pension requirement.
“A reversionary pension continues to be paid to the reversionary beneficiary from the date of death. The pension does not stop,” Busoli said.
“It is still required to satisfy its minimum pension payment requirements even if the pension paid was to the deceased or the reversionary beneficiary. That is, the payments are combined. By way of contrast, a non-reversionary pension is not required to meet the minimum payment in the year of death.”
He said another area that can be confusing regarding the receipt of a reversionary pension is the lodgment of a transfer balance account report.
“A reversionary pension must lodge a TBAR that shows the reversionary pensioner as being in receipt of the pension from the date of the primary pensioner’s death,” he said.
“However, it will not count against the reversionary beneficiary’s transfer balance account for a year. Be careful though, it will count automatically after that, so if this will cause a breach of the member’s transfer balance cap, it should be dealt with within the 12-month period.”
Earnings performance or the receipt of a life insurance payout by the pension account, he said, will not affect the member’s transfer balance cap as it is measured at the date of death.
“In contrast, a death benefit pension commenced from a non-reversionary pension is treated in the same way as if it was paid from the deceased’s accumulation account.”
“Investment earnings and life insurance proceeds will be included in the recipient’s TBAR and are counted against the transfer balance account from the date they begin receiving the pension.”
The treatment for total super balance purposes is different and a reversionary pensioner’s total super balance is increased by the balance of the pension from the primary pensioner’s date of death.
“As the total super balance is measured at the next 30 June, it will include the balance of the pension at that time, including the effect on investment performance and life insurance proceeds,” Busoli said.
“Strategies that rely on the previous year’s total super balance may need to be brought forward as the recipient’s eligibility could be lost in the next financial year due to their altered total super balance at the end of the year.”
He noted that if the Division 296 tax becomes law it will be triggered for a financial year if the member’s total super balance at the end of that year is over $3 million.
“Both pensions are death benefit pensions so cannot be commuted back to accumulation, except when transitioning from one fund to another as the pension is being restarted, without paying a lump sum death benefit payment from the fund.”
