SMSF members with reversionary pensions should note their pension may fail to revert if their nominated reversionary pensioner is deemed ineligible to receive income stream death benefits, an SMSF legal expert has warned.
According to Townsends Business and Corporate Lawyers superannuation online services division managing solicitor Jeff Song, leaving a beneficiary empty-handed could be one of the “unintended consequences” to arise from a situation where a member’s adult child is their nominated reversionary pensioner.
Highlighting sub-regulation 6.21(2)(b)(ii) and (2A) of the Superannuation Industry Supervision (SIS) Regulations, Song said adult children could not receive death benefits as an income stream unless they were a financial dependent of the deceased member or had a prescribed disability, as prescribed by the SIS Act.
“Where the pension is auto reversionary, the continuation of the pension after the death of the member is subject to the nominated reversionary beneficiary being an entitled death benefit income stream (DBIS) recipient,” he pointed out.
“If the nominated beneficiary is not a DBIS recipient and the pension fails to revert, the pension ceases as soon as the member dies. If this is the case, the reversionary nomination is no longer relevant.”
In the case of an ineffective nomination such as a financially independent adult child without a disability, a reversionary pension would cease at the time of the death of the member, he added.
“It is reasonably arguable that accordingly the commutation lump sum from the ceased pension is part of the deceased member’s general death benefit and should be dealt with in accordance with superannuation law and any restrictions in the governing rules of the fund, and not in accordance with the reversionary pension terms,” Song explained.
“If this is the case, in the absence of a binding death benefit nomination, the trustee has absolute discretion to decide which eligible beneficiaries will receive the death benefits and the form and proportion of the death benefits to be paid, subject to the trust deed.
“In making the death benefits determination, the trustee may have regard to the failed ‘reversionary nomination’ but may also decide to allocate the residuary pension benefits and other death benefits to any eligible beneficiaries. The adult child in this discussion may be left empty handed.”
In August, Verante Financial Planning SMSF specialist adviser Liam Shorte said advisers needed to ensure absolute clarity around the intended beneficiaries of reversionary pensions before setting them up for clients.
