Scott Hay-Bartlem, partner at Cooper Grace Ward Lawyers, said that when starting a pension in an SMSF, the member and trustee must have “good pension paperwork” to ensure there are no compliance issues.
“The process involved in electing to have a reversionary pension is that the member applies for the benefit, the trustee decides to pay the benefit and then notifies the member of the decision and the terms of the pension,” Hay-Bartlem said.
“There are rules around this, so good pension paperwork is important.”
He continued that before a pension is started by a member, advisers need to ask if the pension is going to be reversionary to someone.
“That means it needs to be decided when the principal dies whether their pension automatically continues as a reversionary pension to a beneficiary such as a spouse. If it is, then it needs to be clearly stated in all the paperwork,” he said.
“There should be a paragraph that states [that] when the principal dies, the pension automatically continues to the spouse or nominated beneficiary.”
Hay-Bartlem said making a pension reversionary is a core estate planning issue.
“Prior to 2007, there were different tax issues to consider in relation to this, but after 2017, and if Division 296 tax is implemented, there will now also be an array of transfer balance cap issues that must be taken into account,” he said.
He continued that with the proposed Div 296 tax and its relation to the transfer balance cap, advisers need to determine if a client’s request around the pension decision will be viable.
“It will always depend on the circumstances of each client,” he said.
He continued that if a member is drawing a pension, they will still make a binding death benefit nomination (BDBN) to their spouse (or other beneficiary), who will get the superannuation but not in the same way as a reversionary pension.
“It gets interesting if the member does both a reversionary pension and BDBN to one beneficiary. We have seen files where the reversionary pension went to the spouse, but the BDBN went to the estate or children, and then the question is which has priority,” he said.
“It all goes back to what the trust deed says, and different deeds say different things. The key is for everyone to know what kind of pension they want and where they want their BDBN to be directed to see if it will give them the outcome for which they are looking.”
Scott
I do not know why deed writers think differently – In my opinion the rule is simple
If the member has only a pension accounts
a) Reversionary pension – money goes to reversionary beneficiary even if there is a BDN
b) Non-Reversionary pension – Money goes to beneficiary in BDN
If the member has Pension accounts and an Accumulation account
a) Reverionary pension – Pension account money goes to reversionary benefiicary / Accumulation account goes to beficiary of BDN as reversionary pension documents do not control accumulation account
b) Non Reversionary Pension – Money goes to beneficary in BDN
So the key is if there are Reversionary Pension accounts and accumulation account – then there must be both – reversionary pension and a BDN and if there is no accumulation account and only pension accounts one document is enough – either a reversionary pension or a BDN – there is no need for both