Don’t give a directive followed by the word ‘unless’. One phrase I hear all too often is “all pensions should be reversionary”, followed very quickly with “unless….”!
All pensions should be established based on the circumstances at the time they are established and if those circumstances change then so should the pension. This is no more evident than with a transition to retirement (TTR) pension. As is now clear, or at least should be clear, a TTR pension is not a retirement phase income stream until the member retires, attains age 65, is permanently incapacitated or is terminally ill and in all instances except attaining age 65, the pension remains in accumulation phase until such time as the member notifies the trustee of the event.
As death is not a condition or release that triggers the movement of a TTR from accumulation to retirement phase it means care must be taken when establishing the TTR with reference to whether the pension is reversionary or not. The SIS Regulations make it very clear that death is a compulsory cashing requirement and that benefits can be cashed as a lump sum and/or a pension, so long as the pension is in the retirement phase.
Given that most people who establish a TTR do so on the assumption that they will retire or turn 65 prior to their death, it is reasonable to assume that under normal circumstances by establishing the pension as reversionary then in due course it will just revert to their spouse as any ordinary account-based pension would. This is fine except that TTRs are not just any ordinary account-based pension and death doesn’t always proceed retiring or turning 65.
Let’s take the example of a 63 year old in receipt of a TTR with a 62 year old spouse, both are currently working. If the 63 year old sets up their TTR as reversionary and subsequently dies then the TTR would revert to the spouse who is still working and as such the TTR would still be in accumulation phase and be in breach of the compulsory cashing requirements. If the pension was not set up as reversionary, then the spouse could elect to receive the benefit as a death benefit income stream and this would be a new pension, subject to the Transfer Balance Cap of the surviving spouse valued at the day the new pension commences. Of course the pension could be established with a Binding Nomination, subject to the Trust Deed, which dictates that the pension revert to a death benefit income stream upon the member’s death which takes the decision away from the trustee, assuming all else is in order.
What has been clarified in the recently updated draft of LCG 2016/9 is where someone commences a TTR and they have a spouse who is already retired or over 65, or have met one of the other two conditions of release. On the assumption that the surviving spouse has already notified their SMSF trustee (themselves) that they have retired, then the TTR could be set up as reversionary to accommodate continuation of payment following the death of the pensioner as the pension will be in retirement phase when it is paid as a reversion.
So the moral of this story is that a pension that is set up as a reversionary pension may not under all circumstances be able to revert, however, it will be able to be paid as a pension, just a new one! Likewise, there appears nothing necessarily wrong with establishing a TTR as reversionary so long as the parties involved know that the reversion may not be able to kick in if certain conditions haven’t been met and then the trustee may be required to make a decision, subject to any other existing nominations and the Trust Deed. Ultimately the benefits will be able to be paid as a pension but the timing and valuation of the reporting for Transfer Balance Cap purposes will be subject to whether the original pension was able to revert or not.