Reversionary pensions no longer a ‘set and forget’ strategy

She noted one of the well-known benefits of reversionary pensions is that the SIS requirement to deal with death benefit “as soon as practicable” is not relevant as the death benefit has already been dealt with automatically.

The beneficiary would only need to focus on the accumulation account and would still have pressure to cash out or convert to pension as soon as practicable.

Non-reversionary pensions, on the other hand, exert that pressure on both accounts. There is increased pressure to start pension and cash out “as soon as practicable”, which the ATO usually defines as six months. It will also probably mean lower ECPI for the 2021–22 financial year.

However, with the current landscape for death benefits constantly evolving for SMSFs, Ms Heffron questioned if reversionary pensions still retained that attractiveness to easily manage the process in the longer term.

“I still wonder if there are benefits with the reversionary pension over the long term,” Ms Heffron said.

“There’s probably a lot of takeaways here and that is they used to be really attractive, but I’m not sure they’re so attractive anymore or at least I’m not sure that they’re so set and forget anymore.

“They do bring that 12-month transfer balance cap window and probably buy more time in pension phase initially and this can also maximise ECPI. Things such as Commonwealth Seniors Health Cards and age pension benefit, some of the treatment of those for those purposes just continues on uninterrupted.

“There are also the benefits around transfer balance cap and tax components if in this case the trustee had an insurance payout and that had added to the pension balance in the death benefit.”

However, she noted that this always raises the question of how many people receiving pensions also have insurance in place.

“If you think about real life, by the time somebody gets to the pension phase, it’s often also the time we’re cancelling their insurance, so quite possibly, there’s an attraction to having a reversionary pension while insurance is still in play,” she noted.

“Maybe we’d take that reversionary benefit away as soon as the insurance is cancelled because the downsides of the reversionary pension are that it absolutely constrains choice.”

With reversionary pensions, the process has been seen to strongly constrain the options for the surviving beneficiary, as the specific pension account can only go to that specific beneficiary in that specific form of death benefit proceeds.

The changes may also impact contribution plans by bringing the pension into the survivor’s total super balance at an earlier time. There are also ECPI considerations as it continues on pension accounts even when they are non-reversionary.

“I think we used to think of reversionary pensions as being a yes or no where there’s an obvious answer, but that may change,” she said.

“We might talk to clients about reviewing their financial planning, but we often don’t know how often we bring in and should we add or remove a reversionary beneficiary.

“I think the world we’re in at the moment with how these things all interact is that reversionary pensions have probably become a lot less ‘set and forget’ and a lot more ‘let’s think about this over time and to consider revisiting it as it fits different decisions, for different people at different times’ might make perfect sense.”