Should I continue my Super pension after my death?
Estate Planning Update – Autumn 2013
Continuing a pension on a pensioner’s death can have significant tax advantages. On the death of a pension, the pension can continue in one of two ways:
(i) Making the pension reversionary; or
(ii) Having a binding death benefit nomination (BDBN) in place, where the member nominates that their benefits are to be paid to a pensioned dependant in the form of a pension.
Subject to the rules of the fund’s trust deed and pension documentation, the pension can be ‘reversionary’. Essentially, a reversionary pension is a pension that commences being paid to a member who has since died and has continued to be paid to a pension dependant. This legally occurs when a pension is transferred to someone else (i.e. a pension dependant) on the death of an earlier pensioner through either the pension documentation at the time of commencing the pension (possibly after commencement depending on the pension’s rules) or via a BDBN.
Where a death benefit needs to be paid out of the fund as a lump sum benefit, and not a pension, a trustee of a superannuation fund will often have to dispose of one or more of its assets. This will trigger a CGT event that could lead to a capital gain being realized. However, where a death benefit is payable as a pension, there is no large sum that needs to be paid. This therefore allows the fund trustee to often retain all its assets. If assets need to be realised while the fund is paying the pension, then any capital gain incurred will be tax exempt.