Wording key to reversionary pension nominations
SMSF members seeking to make their non-reversionary pension reversionary have several different options at their disposal, but must ensure documentation specifies that their existing pension will continue and leaves no room for trustee discretion, according to Heffron SMSF Solutions.
Speaking at the SMSF administrator’s recent Super Intensive Day in Sydney, Heffron technical services manager Leigh Mansell said it was possible for a member to specify through a binding death benefit nomination that they wanted their pension to revert to their spouse on death.
However, it was important any nomination was worded correctly to ensure no ambiguity in the trustee’s instructions to make the pension reversionary, she said.
“It’s got to be clear that the pension I’m getting is the thing that automatically continues to the other person, so there’s got to be some clarity that it’s the same pension,” Ms Mansell said.
“The ATO has also said the features that indicate something’s not reversionary would be whenever the trustee’s got discretionary powers over who’s going to get the death benefit, is it going to be paid in the form of a lump sum or a pension, and how much they’re going to get.”
Ms Mansell said the firm had recently been asked to consult on a number of similarly worded nominations that provided some discretion to the trustee as to whether a benefit would be paid as a lump sum or reversionary pension, as trustees were wanting to keep their options open while retaining the tax concessions of both types of benefit.
“I said to the adviser, ‘What are you trying to achieve with this?’ It sounded like they wanted the best of both worlds, they want it to be reversionary so they’ve got certainty over who owns the bucket of money and they’ve got the 12-month deferral on the transfer balance cap, but also if they don’t want that they want to be able to take a lump sum and not have a problem with caps,” she said.
“The lawyer is adamant that this is going to make their non-reversionary pensions reversionary, but I would read that as a practitioner and think I’m not really sure about that, if you end up in court as soon as you see the words ‘absolute discretion’ [in the documentation], it’s a bit iffy.”
Ms Mansell said an easier way to convert a non-reversionary pension to reversionary may be to alter clauses within the trustee’s pension agreement, which would prevent any issues with interpreting nomination documents.
“The trust deed of the fund and the pension documentation they had in place might be flexible enough for the member to say, ‘Hey, trustee, I’d like to delete this clause in my pension agreement and replace it with this’,” she said.
“The way we did this in the lead-up to [the] 30 June 2017 [super changes] was we made sure the deed allowed you to tack on or remove a reversionary pensioner without turning a pension off and starting a brand-new pension.”
