According to Topdocs national manager for training and advice Michael Harkin, the documentation to start an account-based pension or TRIS normally follows a consistent theme.
However, he said a key document that is often missing but needs to be included is a well-provisioned pension agreement.
Mr Harkin said there’s a simple reason why pension agreements are not always provided.
“The preparation of a pension agreement requires legal expertise, and as such, many providers and most software packages do not include pension agreements in their pension commencement packages as it is outside of the scope of their insured services,” he said.
Mr Harkin said a pension agreement is signed by both parties, the trustee and the member. In addition, the pension agreement is binding on those parties until cancelled or replaced by a new agreement.
“In the event of a dispute as to the effectiveness or validity of the reversion of an income stream following the death of a member, and remembering the antagonism which can arise among family members and particularly in a blended family scenario, the additional certainty provided by an enforceable income stream agreement may be the difference between the matter going to court and one party understanding it needs to back away,” he said.
“Conversely, if the matter does end up in court, the presentation to the court of the binding agreement, among other documentation, is likely to be of significant assistance to the court in determining and enforcing the wishes of the deceased member.”
Laws and regulations on pension agreements
Mr Harkin said SMSF income stream documents that don’t include a pension agreement may not meet the ATO requirements for an income stream.
He pointed to TR 2013/5, Income tax: When a superannuation income stream commences and ceases, as possibly the most important ATO guide on the operation of SMSF income streams.
“TR 2013/5 contains a number of references to an agreement, including ‘the agreement between the fund and the member’ in the definition of a superannuation income stream benefit and similar wording in determining whether or not a commutation has occurred (our emphasis added),” Mr Harkin said.
“Effectively, the lack of such an agreement may not seem overly serious, but it could well prove to be quite serious.”
Mr Harkin noted the amount of case law developed in recent years in the SMSF space that mainly stems from disputes over the validity or effectiveness of binding death benefit nominations (BDBNs).
He said the increase in the amount of family wealth held in SMSFs and the conflicting interests within families, particularly blended families, have combined to result in more disputes being dealt with by courts than in the earlier years of SMSFs.
Further, Mr Harkin said the introduction of the transfer balance cap has also resulted in many pensions being restructured and a combination of BDBNs and pension reversions being used to direct member death benefits.
“While there has not been the same number of cases involving the reversion of an income stream following the death of a member, it is highly likely that litigation on the validity or enforcement of income stream reversion documentation will also increase as a result, particularly with poorly drafted documentation,” he said.
“Without a pension agreement, often the only reference to the proposed reversion of an income stream will be in the member request and the trustee resolution. Litigation may determine they are not sufficient, resulting in the income stream ceasing and, possibly, being paid in accordance with other instructions, such as a BDBN.
“Simple letters and minutes may not be enough — but a pension agreement, signed by the trustee and member and in line with the trust deed, provides the spouse with a far higher likelihood of retaining their death benefits.”
