When navigating superannuation options, it’s crucial to understand what happens to your retirement savings in the event of death. John, aged 52, recently inquired about the future of his superannuation and insurance benefits should he pass away. With a balance of A$900,000 in his AustralianSuper account and his wife’s balance at A$300,000, his questions about reversionary pensions and insurance payments highlight important considerations for many Australians.
John’s primary concern is whether his wife could start a reversionary pension when she turns 60. Unfortunately, according to Leigh Mansell, a director of technical and education services at SMSF specialist Heffron, the answer is no. Since John has not yet commenced a pension, there is no existing pension to revert to his wife. Reversionary pensions can only continue if the pension had already started before death.
Upon John’s death, his superannuation will be classified as a death benefit, from which his wife can initiate a new pension in her own name. Superannuation law mandates that death benefits be managed as soon as practicable following a member’s death. This timeline is influenced by factors such as whether a valid binding death benefit nomination is in place. Such a nomination instructs the super fund on how to distribute the benefits, including any life insurance, upon the member’s passing.
The A$800,000 insurance policy within John’s superannuation further complicates the situation. Mansell notes that AustralianSuper may need to wait for the insurance proceeds before finalizing the distribution of death benefits. In any case, John’s superannuation cannot remain in his name indefinitely. The requirement to manage these benefits promptly means that the funds cannot simply be kept in his name until his wife reaches age 60.
To facilitate a reversionary pension, it is essential that John be receiving a pension at the time of his death and that he has nominated his wife as a beneficiary. Graeme Colley, an independent superannuation specialist, emphasizes that under current laws, there is no option to defer starting a pension until his wife reaches age 60. However, John could start a pension at age 60 if eligible, allowing him to designate his wife as a reversionary beneficiary for continued pension payments.
A binding nomination will ensure that his wife receives the benefit upon his death, giving her the flexibility to choose between a lump sum, an income stream, or a combination of both. Colley notes that there is typically no limit on how often a pension can be converted to a lump sum, which could assist her with additional expenses following John’s passing.
If John were to begin a pension prior to his death, the pension payments would be subject to minimum payment rules based on his wife’s age. For instance, if she were to receive a pension before turning 65, the minimum would equal four percent of the account balance at the start of the financial year.
The amount accessible to John’s wife through a reversionary pension is also limited by her transfer balance cap. This cap represents the total she can use to commence pensions from superannuation, including any reversionary pensions. For the 2025-26 financial year, the transfer balance cap is set at A$2 million, applicable only if she has not previously commenced a pension. If the total value exceeds this cap, she would need to withdraw the excess as a death benefit lump sum.
Tax implications are another crucial aspect to consider. Any lump sums paid to John’s wife upon his death will be tax-free, including those from a commuted reversionary pension. If John is over 60 at the time of his death, the reversionary pension will also be tax-free for his wife. However, should both John and his wife be under 60, a calculation will determine the taxable and tax-free portions of the pension. The taxable portion is taxed at standard personal rates, but a tax offset of 15 percent on the taxable amount may apply. Once his wife reaches age 60, the pension will become tax-free for her.
Understanding these superannuation options is vital for ensuring that loved ones are adequately provided for after one’s passing. John’s inquiry serves as a reminder of the importance of planning and clarity regarding superannuation benefits and the implications for surviving spouses.
