Death benefits, Pensions

Legacy pension benefits locked in from start

Legacy pension benefits

The treatment of death benefits from a legacy pension are likely to be predetermined, offering limited choices to the pension beneficiary.

The direction of death benefits from a market-linked pension held by an SMSF member are likely to have been set from the outset, but will require investigation to ensure they are paid correctly, according to a technical expert.

Heffron SMSF technical and education services director Leigh Mansell said while legacy pensions are a niche product within SMSFs, those who hold them are getting older and questions are being asked as to what happens to the death benefits from the pension when its owner dies before the end of the term of the pension.

“If you are dealing with a client that has an old market-linked pension and they die before the end of the term, you need to have a look at a couple of different things,” Mansell said during a recent online briefing.

“Firstly, [was] the pension reversionary? If the answer is no, then you deal with it in the same way as you would the death of a member who had an account-based pension and look at cashing a death benefit from the remaining balance of that market-linked pension.

“If the answer to the question of a reversionary pension is yes, then you will need to drill down further and look at when the pension was started, did the original pensioner, who has now died, chose a term and whose term did they choose.”

She said the original pensioner would have chosen a term based on their own age or how many years they had until their 100th birthday.

If the term was based on either figure for the reversionary pension, there was no choice available and the income stream must revert to the beneficiary as a market-linked pension, she noted.

“It is the same pension with the same terms, features and conditions and all we are doing is ripping the label off and putting a new label on top. The survivor basically inherits a reversionary pension,” she said.

“If the term the original pensioner chose was based on their own age or their own years to 100, then the survivor does have a choice.

“They can keep the pension as a market-linked pension or can decide they don’t want the pension to revert to them and have it in the form of a lump sum payment or an account-based pension if they have got enough cap space.”

Copyright © SMS Magazine 2024

ABN 43 564 725 109

Benchmark Media

Site design Red Cloud Digital