My clients have a Self Managed Super Fund (SMSF). Leonard and Penelope are the only members. They have the Law Central Pension Pack. Both members have named each other as reversionary beneficiaries of their pensions. They also made binding death benefit nominations to other dependants.
What happens to their super if only one member dies? Where does the superannuation benefit go?
Accountant, Barossa Valley, SA.
Excellent question. Not many people consider how the two nominations work together. On the one hand you tell the SMSF trustee to pay the pension to the reversionary beneficiary. On the other hand you tell the SMSF trustee to pay your superannuation death benefit to different dependants.
How is a Reversionary Pension beneficiary different to a Death Benefit beneficiary?
A reversionary pension beneficiary is the person nominated to get the member’s pension after they die. They’re not entitled to any super that remains in accumulation phase. They merely take over the income stream that is the pension.
The death benefit beneficiary is the person nominated to get the member’s super entitlements after they die. The two need not be the same. You may want your wife to take your pension and your kids to take the death benefit.
It is a good idea to consult your accountant when making the relevant nominations. Your accountant can crunch the numbers for you to ensure everyone is looked after.
Let’s look at the following example:
George and Mildred are married with 2 financially dependent children under 25. They had their children later in life. Both George and Mildred are at their preservation age. Part of their super is in pension phase and the rest remains in accumulation phase. George and Mildred nominate each other as reversionary pension beneficiaries. They each make binding death benefit nominations in favour of their children.
George dies. His super that is in pension phase passes to Mildred. She now receives George’s pension and her own. The children get the super that is in accumulation phase under the death benefit nomination. Because the children are all dependants under the SIS Act and Tax Acts – they get the super tax free.
Consult your accountant and tax lawyer before making nominations in your fund. Your team of professionals help you resolve the following issues:
- Is the reversionary beneficiary a ‘pension dependant’?
- Is the reversionary pension beneficiary nomination allowable under the rules of the fund?
- Is the death benefit beneficiary a ‘dependant’ under the SIS Act?
- Is the death benefit nomination binding or non-binding?
- What discretion does the SMSF trustee have when either or both nominations are made?
- What effect does the death benefit nomination have on the reversionary pension where all the super is in pension phase?
- Can the SMSF trustee distribute the super and not follow the reversionary pension beneficiary nomination?
Essentially it is possible to give effect to both a reversionary pension and a binding death benefit nomination. With some careful planning from your accountant and Tax Lawyer – you can get some super to your dependents tax free and still provide the pension to your spouse.
Remember if you don’t make any nominations in your fund, the SMSF trustee generally directs the death benefit to your estate and it passes through your Will. That’s not a good outcome for your dependents. A Will can be challenged by a variety of people. If you can deal tax effectively with your super in the fund – that is generally the best way to go.
Source: LawCentral Newsletter 27/04/2011