Superannuation

Reader’s question: Can you clarify whether a clause allowing the nomination of a reversionary beneficiary must be included in a DIY fund trust deed at the time of the commencement of the pension or whether the deed may be subsequently amended?

My original deed, in which my wife and I are the trustees and only members, was executed in 1999 without any reference to a reversionary beneficiary. The deed was amended in 2009 to include it. This would seem to be consistent with section 59 (1A) of the Superannuation Industry (Supervision) Act, which provides that a member may give notice to a trustee requiring the provision of benefits to a member on or after the member’s death.

While some trust deeds will detail the terms and conditions of pensions which can be paid from the funds, others use a different approach, explains Tod Fankhauser of DIY super administration company Heffron.

Written request

They typically say the trustee can pay benefits in accordance with a written request from a member that follows superannuation law. For pensions, the superannuation industry (supervision) regulations set out certain types of pensions allowed to be paid by regulated super funds, including DIY funds.

Putting your question in this context, it is certainly possible to have a reversionary beneficiary in place – even if the trust deed does not specifically require it or is silent on what happens to the pension on death.

Prohibition

It is important that the deed does not specifically prohibit the payment of a pension to a spouse at the time the benefit is paid. For example, if the deed requires that the balance remaining in the pension on a member’s death be paid as a lump sum to the deceased’s estate, this would prevent a pension from being paid to the spouse.

Therefore if the pre-2009 deed contained a clause that required the pension balance be paid to your estate but this was removed by amendment, the trustee would then be able to pay a pension to the spouse on death.

Of course the fund will still have to comply with superannuation law generally but will not be required to limit the payment options in accordance with the pre-2009 trust deed.

Big question

Fankhauser says that sometimes an equally important question is what the trustee must do. In this case, for example, are there circumstances under which the trustee is required to pay a reversionary pension?

If the 2009 amendment requires that, when a pensioner dies, the balance remaining in the account must be paid as a pension to the surviving spouse, the trustee will have to comply with these terms. This is actually more restrictive than superannuation law.

But if the 2009 amendment does not require it, you might put in place a so-called binding death benefit nomination. This is an instruction to the trustee to pay whatever remains in the account as a pension to the spouse on the original pensioner’s death.

Not applicable

You mention section 59 (1A) of SIS, which deals specifically with these types of instructions. This section doesn’t actually apply to DIY funds. Rather it allows large fund trustees to accept binding instructions from members in relation to one specific issue: death benefits.

Normally, large fund trustees cannot be directed by fund members. Provided the trust deed allows it, DIY fund members have a more general power to issue binding instructions to the trustee, not just limited to death benefits.

An alternative

Another route to ensure the balance is paid as a pension is to simply ask the trustee to make the pension reversionary now – in other words, lock in a guaranteed ongoing payment to the spouse retrospectively.

In Heffron’s view, the safest way to do this would be to technically cease the old pension and start a new one under the post-2009 deed. This could specifically incorporate an instruction from the member to make the pension continue to the spouse on death.