A reversionary pension is a pension that automatically continues to a nominated beneficiary (the “reversionary beneficiary”) upon the death of the original pension recipient, without requiring a new application or trustee decision.
How Reversionary Pensions Work
When you commence an account-based pension (ABP) in super, you can nominate a reversionary beneficiary — typically your spouse. If you die:
- The pension continues automatically to the reversionary beneficiary
- No trustee discretion is involved — it happens automatically
- The beneficiary receives the pension payments at the same (or adjusted) rate
- No new pension needs to be established
This contrasts with a non-reversionary pension, where on death the balance becomes a death benefit that the trustee then distributes — which can involve delays and trustee decision-making.
Who Can Be a Reversionary Beneficiary?
To be nominated as a reversionary beneficiary, the person must be a dependant for super purposes:
- Spouse (including de facto and same-sex)
- Child (including stepchildren and adopted)
- Financially dependent person
- Interdependant
In practice, reversionary pensions are most commonly used by spouses.
Advantages of a Reversionary Pension
- Automatic continuity: No delays — pension payments continue during what is already a difficult time
- No trustee discretion: Avoids the trustee potentially directing the benefit differently
- Tax efficiency: The pension continues in its existing form — no need to cash out and re-establish
- Centrelink timing: For Age Pension assessment purposes, the reversionary pension is assessed 12 months after the death — providing a 12-month window before the reversionary beneficiary’s Age Pension is affected
Transfer Balance Cap Implications
A reversionary pension that automatically transfers to a spouse counts toward the spouse’s Transfer Balance Cap (TBC) — but not until 12 months after the date of death. This gives the receiving spouse time to adjust.
If the reversionary pension would cause the spouse to exceed their TBC, they may need to commute (cash out) some of the pension within the 12-month period.
Example:
- Deceased member’s account-based pension value on death: $900,000
- Spouse’s existing TBC cap usage: $1,200,000
- TBC: $1,900,000
- After adding reversionary pension: $2,100,000 — exceeds cap by $200,000
- Spouse needs to commute $200,000 to accumulation or cash out within 12 months
Reversionary Pension vs BDBN (Binding Death Benefit Nomination)
| Feature | Reversionary Pension | BDBN (lump sum) |
|---|---|---|
| Trustee discretion | None — automatic | None if valid BDBN |
| Payment type | Ongoing pension | Lump sum |
| TBC timing | 12 months after death | Immediate |
| Flexibility for beneficiary | Limited (must accept pension) | Can take as lump sum |
| Centrelink timing | 12-month deferral | Immediate assessment |
For spouses, a reversionary pension is often preferred because:
- It maintains the tax-free pension structure (if in retirement phase)
- The 12-month Centrelink deferral can be very valuable for Age Pension recipients
- No timing risk — it is automatic
Setting Up a Reversionary Pension
A reversionary beneficiary nomination must be made at the time the pension commences. You generally cannot add it retrospectively. Check your fund’s rules:
- Some funds and SMSF deed terms support reversionary nominations
- The nomination must specify the beneficiary clearly (name, relationship, DOB)
For more: Estate Planning and Super, Death Cover in Super, Account-Based Pensions. For advice tailored to your situation, speak with a licensed financial adviser via MoneySmart.