Most SMSF trustees set up their account based pensions as reversionary years ago and have never revisited the decision. For retirees with balances approaching or above $3 million, that choice now affects how Division 296 tax hits a surviving spouse.
What’s the difference between a reversionary and a death benefit pension?
A reversionary pension is nominated in advance. It automatically continues to a beneficiary, typically a spouse, the moment the member dies. Payments don’t stop. No new pension needs to start.
A death benefit pension, by contrast, is a new income stream that begins after death. The trustee commences it at their discretion or under a binding death benefit nomination, once the fund determines who is entitled and how the benefit will be paid.
The 12-month deferral
Every retirement phase pension is measured against a person’s transfer balance cap (TBC). The TBC limits how much can move into the tax-free pension phase.
With a reversionary pension, the credit to the beneficiary’s transfer balance account doesn’t apply until 12 months after the member’s date of death. The credit is fixed at the pension’s value on the date of death. It doesn’t change regardless of what happens to the balance in the meantime.
A death benefit pension has no such buffer. The credit applies immediately once the beneficiary becomes entitled to it. It’s based on the value at that later date, which can be higher if the balance grew in the interim.
That gap gives a reversionary beneficiary time to decide whether they need to commute part of the pension to stay under their own cap. A death benefit pension forces that decision straight away.
How does this impact Division 296?
The transfer balance cap credit for a reversionary pension defers for 12 months. The surviving spouse’s total super balance, however, increases by the value of the reversionary pension from the date of death immediately, with no deferral.
Total super balance determines whether Division 296 applies. Centrelink tests it on 30 June each year. A surviving spouse can therefore cross the $3 million Division 296 threshold in the same financial year their partner dies, even though their transfer balance cap grace period hasn’t run out.
What’s the trade-off?
Reversionary nominations are simple and reliable. Payments continue without interruption, which matters when a surviving spouse is already dealing with enough.
That simplicity, however, comes at the cost of flexibility. A reversionary pension can only go to one nominated person. Once set, options like child pensions or directing the benefit through a testamentary trust are generally off the table.
What we’re seeing
We’re increasingly reviewing reversionary nominations for SMSF clients with balances in the $3 million plus range. Many of these nominations were set up well before Division 296 existed. Nobody has looked at them since. In several cases, a large reversionary pension combined with an already substantial balance for the surviving spouse pushes their total super balance over the threshold sooner than the family expected.
Speak to us
Every situation is different, and the right plan depends on your personal circumstances, goals, and existing structures. If you’d like to discuss whether your current nomination still makes sense, please get in touch with Mark O’Toole, Daniel Lunardi, and the Ascent Private Wealth team.
The advice provided here is general in nature only as, in preparing it we did not take account of your investment objectives, financial situation or particular needs. Before making an investment decision on the basis of this advice, you should consider how appropriate the advice is to your particular investment needs, and objectives. You should consider the relevant Product Disclosure Statement before making any decision relating to a financial product.