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A reversionary beneficiary strategy is an estate planning approach in superannuation where a member nominates a reversionary beneficiary to continue receiving their superannuation pension payments after they pass away. This strategy can be a powerful tool to provide a surviving spouse or dependent with financial security while also offering potential tax advantages. By nominating a reversionary beneficiary, superannuation members can ensure a smooth transition of their pension, maintain control over their retirement assets, and reduce the risk of disputes.

This blog post explores how a reversionary beneficiary strategy works, its benefits and drawbacks, and the considerations for effectively incorporating it into an estate plan.

What Is a Reversionary Beneficiary in Superannuation?

A reversionary beneficiary is a person nominated to continue receiving superannuation pension payments after the original member passes away. When a reversionary beneficiary is named, the pension automatically reverts to that beneficiary, meaning that it continues without interruption as a retirement income stream.

Eligible Reversionary Beneficiaries:

Spouses (including de facto and same-sex partners)
Children under age 18, full-time students under 25, or disabled children
Financial dependents or interdependent individuals, depending on the fund’s rules

The nomination must meet the eligibility criteria set by the Australian superannuation system and the specific super fund to be legally valid.

How a Reversionary Beneficiary Strategy Works

When a superannuation member commences a pension account, they can nominate a reversionary beneficiary who will automatically receive the remaining balance of the pension after the member’s death. The benefits of the pension, including income streams and potential tax concessions, are passed directly to the beneficiary, providing a seamless continuation of income.

Key Characteristics:

Automatic Continuation: The pension income continues to the reversionary beneficiary without the need for complex applications or administrative processes.
Control and Certainty: The nomination of a reversionary beneficiary is legally binding, reducing the risk of disputes and challenges in the estate.

Advantages of a Reversionary Beneficiary Strategy

A reversionary beneficiary strategy offers several benefits that make it an effective estate planning tool:

Income Continuity for Beneficiaries: The pension payments continue uninterrupted, providing financial stability for surviving spouses or dependents.
Tax Efficiency: For eligible beneficiaries, particularly spouses over age 60, the pension income may continue tax-free, preserving more wealth within the superannuation structure.
Minimises Estate Disputes: A reversionary nomination is binding, providing certainty in estate planning and reducing the risk of disputes or challenges from other beneficiaries.
Preservation of Pension Status: The pension account remains active, keeping the investment structure intact without the need to establish a new income stream.

Disadvantages and Limitations of Reversionary Beneficiary Nominations

While advantageous in many cases, reversionary nominations have certain limitations:

Less Flexibility: Once nominated, changing or removing a reversionary beneficiary can be difficult, requiring the establishment of a new pension account.
Restrictions on Beneficiaries: Only eligible dependents can be nominated, limiting the scope of potential beneficiaries.
Potential for Excess Transfer Balance Cap Issues: If the reversionary pension causes the beneficiary to exceed their Transfer Balance Cap (currently AUD 1.9 million), they may face excess tax liabilities.

Reversionary Beneficiary vs. Non-Reversionary Beneficiary

A reversionary beneficiary nomination is not the only way to pass on superannuation benefits. Superannuation members can also nominate non-reversionary beneficiaries, where benefits are paid as a lump sum or the beneficiary must commence a new pension.

Reversionary Beneficiary:

Income continues automatically to the beneficiary.
Fixed and legally binding.
Generally simpler and less administratively complex.

Non-Reversionary Beneficiary:

No automatic continuation; beneficiary must initiate a new pension or withdraw a lump sum.
Provides flexibility in beneficiary nominations, including multiple beneficiaries.
Subject to trustee discretion if no binding nomination is made.

Tax Considerations for Reversionary Beneficiaries

A reversionary beneficiary strategy can offer tax efficiencies, particularly for spouses and tax-dependent beneficiaries.

Spouses Over Age 60: Pension income continues tax-free, making it one of the most tax-effective ways to provide for a surviving spouse.
Beneficiaries Under Age 60: Income received may be subject to tax, but they receive concessional rates on earnings within super.
Transfer Balance Cap: The transfer balance cap limits how much super can be transferred to a tax-free retirement account. If a beneficiary’s total super balance exceeds the cap, excess amounts may need to be withdrawn or moved to an accumulation account.

Transfer Balance Cap Implications

The Transfer Balance Cap currently limits the amount that can be held in tax-free superannuation pensions to AUD 1.9 million. For reversionary beneficiaries, the balance of the inherited pension counts toward their cap, which could lead to excess amounts that may incur penalties.

Strategies to Manage the Transfer Balance Cap:

Partial Commutation: Excess amounts above the cap can be transferred back into the accumulation phase, where earnings are taxed at 15%.
Strategic Withdrawals: Beneficiaries may choose to withdraw a portion of the superannuation balance if it exceeds the cap.

Making a Reversionary Beneficiary Nomination

Nominating a reversionary beneficiary is usually done when starting a superannuation pension account, though it’s essential to check your fund’s rules. Steps include:

Check Fund Rules: Confirm that your super fund permits reversionary nominations and ensure eligibility of the beneficiary.
Consider Beneficiary’s Financial Needs: Assess the beneficiary’s need for ongoing income and how this nomination fits within your broader estate plan.
Complete the Nomination Form: Submit the reversionary nomination form to your super fund when you begin your pension.
Review Periodically: Life changes, such as marriage, divorce, or death, may require updating your reversionary beneficiary nomination.

Alternatives to Reversionary Beneficiary Nominations

For those seeking more flexibility or different estate planning goals, other nomination options include:

Binding Death Benefit Nomination: Provides certainty by directing super benefits to nominated beneficiaries, including as a lump sum.
Non-Binding Death Benefit Nomination: Guides the trustee but leaves final discretion with the trustee, allowing for adjustments to suit the circumstances at the time of death.
Discretionary Trusts: Consider establishing trusts outside super for beneficiaries who cannot directly receive a superannuation income stream, such as adult children.

Reviewing and Updating Estate Plans with Reversionary Nominations

A reversionary beneficiary nomination should be reviewed as part of your overall estate plan. Major life events, legislative changes, or changes in superannuation rules may warrant an update.

Periodic Review Checklist:

Assess if the reversionary beneficiary’s financial needs remain the same.
Check for Transfer Balance Cap changes.
Ensure the reversionary nomination still aligns with your goals and any changes in superannuation laws.

Seeking Professional Advice

Because reversionary nominations impact tax, estate planning, and superannuation, consulting with professionals can help you make informed decisions. A qualified financial adviser or estate planning lawyer can assist in:

Tax Planning: Evaluating the tax implications of reversionary nominations for you and your beneficiary.
Estate Strategy Alignment: Ensuring that the reversionary nomination fits within your estate plan, particularly if there are other beneficiaries.
Compliance with Superannuation Rules: Ensuring compliance with fund and regulatory requirements for eligible reversionary beneficiaries.

Conclusion

A superannuation reversionary beneficiary strategy can be a valuable tool for those looking to provide ongoing income to a spouse or dependent after passing away. By setting up a reversionary beneficiary nomination, you can offer financial security to loved ones, create tax efficiencies, and simplify the estate planning process. While this strategy offers numerous benefits, it’s essential to carefully consider the potential impact on your Transfer Balance Cap and how it aligns with your overall estate plan. Consulting a financial adviser or estate planning professional can help ensure your nomination reflects your intentions and provides maximum benefit to your beneficiaries.