Reversionary pensions that don't revert

 

What happens where, at the time of death of the pensioner, a reversionary pension fails to revert because the nominated reversionary pensioner (an SIS Act dependant) is not eligible to receive income stream death benefits, for example where the nominated reversionary pensioner is an adult child of the deceased member.

SIS sub-regulation 6.21(2)(b)(ii) and (2A) provides that death benefits in the form of income stream can only be paid to an SIS Act dependant of a member and in the case of a child is less than 18 years of age or being 18 or more years of age, is (i) financially dependant on the member and less than 25 years of age or (ii) has a prescribed disability.  Adult children (not under a disability) can only receive death benefits in the form of lump sums.

A pension ceases as soon as a member in receipt of the pension dies unless a dependant beneficiary is automatically entitled to a reversionary pension (ATO publication:  Starting and Stopping a Pension).

An account-based pension has to meet prescribed standards in the SIS Regulations.  One of the standards in SIS sub-regs 1.06 (9A) and (9B) is:

"the pension is transferable to another person only on the death of the beneficiary (primary or reversionary) to an eligible dependant in the form of a pension under para 6.21(2b) or 6.21(2A) or (2B)."  Para 6.21(2b) and 6.21(2A) defines income stream death dependants.

Where the pension is auto reversionary, the continuation of the pension after the death of the member is subject to the nominated reversionary beneficiary being an entitled death benefit income stream (“DBIS”) recipient.

If the nominated beneficiary is not a DBIS recipient and the pension fails to revert, the pension ceases as soon as the member dies.  If this is the case, the reversionary nomination is no longer relevant.

A valid auto-reversionary pension is a carve out as the pension continues and therefore does not form part of the general death benefits of the member.  However, where the nomination is ineffective, the pension ceases immediately at the time of the death of the member.  It is reasonably arguable that accordingly the commutation lump sum from the ceased pension is part of the deceased member’s general death benefit and should be dealt with in accordance with superannuation law and any restrictions in the governing rules of the fund, and not in accordance with the reversionary pension terms.

If this is the case, in the absence of a binding death benefit nomination, the Trustee has absolute discretion to decide which eligible beneficiaries will receive the death benefits and the form and proportion of the death benefits to be paid, subject to the trust deed.

In making the death benefits determination, the Trustee may have regard to the failed “reversionary nomination” but may also decide to allocate the residuary pension benefits and other death benefits to any eligible beneficiaries.  The adult child in this discussion may be left empty handed.

Look out for unintended consequences that may arise where a child is the nominated reversionary pensioner and the pension fails to revert because at the time of death of the pensioner, the child has is no longer a DBIS dependant.

For further information, please call Townsends Business & Corporate Lawyers on (02) 8296 6222 or email info@townsendslaw.com.au

Media Release