A technical specialist has suggested an attitude change toward reversionary pensions may be needed to provide SMSF members with greater flexibility in how they would like to manage a superannuation death benefit.
“[Reversionary pensions] used to be really attractive. I’m not sure they’re so attractive anymore or at least I’m not sure they’re so set-and-forget anymore,” Heffron managing director Meg Heffron said during her presentation at the SMSF Association Virtual Technical Summit 2021 held last week.
“They do bring a 12-month transfer balance cap window, they probably buy more time in pension phase initially and Commonwealth Seniors Health Card and age pension benefits [treatment] will just continue on uninterrupted [if a reversionary pension is in place].”
However, Heffron emphasised advisers need to be aware of the constraints associated with reversionary pensions that may not work in an SMSF trustee’s favour.
For example, she noted the recipient of the death benefit pension has no choice but to receive it in the form of an income stream.
“[The beneficiary] couldn’t say: ‘Is the family better if we get that [death benefit] to his estate?’ [Nor can they say:] ‘I’m going to cash that bit out and take what’s in [the deceased’s] accumulation account as a pension’ [without] more fiddling around to ensure [things like] minimum pension payments were made,” she pointed out.
“So [making a pension reversionary] would [in this case] end up being slightly more complicated with less choice.”
Further, she said reversionary pensions can prevent more money being retained in the tax-effective super system due to contributions restraints they may cause as a result of the impact they can have on the death benefit recipient’s total super balance.
“So I think we used to think of reversionary pensions as being a yes/no [proposition] with an obvious answer and a bit set and forget. We might talk to clients about reviewing their financial planning, but I don’t know how often we [consider whether] we should add or remove a reversionary beneficiary,” she observed.
Taking into account how factors such as contributions interact with the treatment of death benefits in the current superannuation system framework should now prompt a change in the use of reversionary pensions, she advised.
