Reversionary Pension: What Happens to Your Super Income Stream When You Die

🔄 What is a reversionary pension?🔗

A reversionary pension is an account-based pension that automatically continues to a nominated beneficiary when you die, rather than stopping and being paid out as a lump sum.

🎯 The essential: The key word is automatic. Your super income stream doesn't stop. Payments keep flowing to your nominated reversionary beneficiary, usually your spouse, from the day you die. No trustee decision, no waiting for the fund to work out what to do.

This is different from what happens with a non-reversionary pension. If you haven't made a reversionary nomination, your pension stops on death. The remaining balance is commuted to a lump sum death benefit, and your beneficiary or estate receives it. They'd need to start a new pension if they're eligible, which takes time and involves trustee discretion.

The reversionary nomination is generally set up when you start the pension, not after the fact. Most funds require it at the time you open the account, so it isn't usually something you can add later as an afterthought, though some SMSFs have more flexibility depending on the trust deed, so check your fund's rules directly.

👪 Who can be a reversionary beneficiary?🔗

You can only nominate one reversionary beneficiary, and they must be an eligible dependant under superannuation law at the time of your death.

Eligible reversionary beneficiaries include:

• Your spouse or de facto partner, including same-sex partners
• A child under 18
• A financially dependent child of any age
• A child with a permanent disability, as defined under the Disability Services Act 1986
• Someone in an interdependency relationship with you, meaning you live together, share a close personal relationship, and one or both of you provides financial and personal care for the other

Adult financially independent children generally cannot be nominated. This catches a lot of people out. If your kids are grown up and supporting themselves, they're not eligible.

⚖️ Reversionary pension vs. binding death benefit nomination🔗

Both tools direct what happens to your super when you die, but they work very differently. For the full picture on how a binding death benefit nomination works, including the mistakes that can invalidate one, see our dedicated guide.

What happens without a reversionary nomination? The pension stops on death. The balance is commuted to a lump sum death benefit. The beneficiary or estate receives it, and if they want an income stream, they'd need to start a new pension, which involves trustee discretion and takes time.

A reversionary pension and a BDBN can interact in complex ways. Generally, a valid reversionary pension nomination takes precedence over a BDBN for that pension, but this depends on your fund's trust deed.

🏛️ The transfer balance cap trap most people miss🔗

This is where things get genuinely important, and where most people, and a lot of online articles, gloss over the detail.

Your surviving spouse's transfer balance cap (TBC) is affected by the reversionary pension. The TBC is the lifetime limit on how much super you can hold in retirement phase to generate tax-free income. The general TBC is $2.1 million from 1 July 2026, up from $2 million previously. If you're still working out how much you can draw from super in the first place, our guide to how much super you can withdraw after 60 also covers how the TBC works alongside your withdrawals.

Here's how the reversionary pension interacts with it:

The 12-month grace period. When your spouse starts receiving your reversionary pension, it doesn't immediately count against their TBC. They get a 12-month window before the credit hits their transfer balance account. During that time, the pension keeps paying, they just don't have to worry about the TBC impact yet.

The credit is valued at the date of death. After 12 months, the credit that gets applied to your spouse's TBC is based on the value of the pension at the date of death, not what it's worth 12 months later. Earnings and pension payments during that 12-month period don't change the credit amount.

If they'd exceed their cap, they need to act within those 12 months. They can commute part, or all, of the reversionary pension, or commute part of their own existing pension, back to accumulation phase, or withdraw it from super entirely.

🧮 Worked example: Margaret and David🔗

Let's make this concrete.

Margaret, 72, has her own account-based pension worth $1.4 million. Her personal TBC is $2.1 million. She's used $1.4 million of it, leaving $700,000 of headroom.

Her husband David dies. His account-based pension was worth $800,000 at the date of his death. He had nominated Margaret as his reversionary beneficiary.

The pension keeps paying to Margaret immediately. But 12 months after David's death, the ATO will credit $800,000 to Margaret's transfer balance account.

🎯 The essential: The problem: an $800,000 credit against $700,000 of headroom leaves a $100,000 excess.

If Margaret does nothing, she'll have an excess transfer balance, and the ATO will issue an excess transfer balance determination, which comes with tax consequences.

What Margaret needs to do within 12 months: commute at least $100,000 from either her own pension or David's reversionary pension back to accumulation phase, or withdraw it from super.

The good news: she has 12 months to sort this out. The grace period is genuinely useful. She can take time to get advice, understand her options, and make a considered decision, rather than being forced to act in the immediate aftermath of David's death.

Key reminder: the credit is locked at $800,000, David's balance at date of death. Even if the pension has grown or shrunk during those 12 months, that's the number that counts.

💸 Tax treatment, a quick note🔗

If both you and your spouse are over 60, pension payments from a reversionary pension are generally tax-free. That applies whether it's your own pension or the reversionary pension you've inherited.

If either of you is under 60, different tax treatment applies depending on the age of the deceased and the recipient, and the tax components of the super balance. It gets complicated quickly. For the full picture on super income stream death and tax, see our guide to superannuation death benefit tax.

🤔 Should you set up a reversionary pension?🔗

It's not right for everyone. Here's the honest version.

Pros:

• Income keeps flowing to your spouse immediately, no gap, no waiting
• No trustee discretion over who gets the money or in what form
• The 12-month TBC grace period gives your spouse breathing room
• Simpler administration at an already difficult time
• Doesn't lapse, unlike a BDBN that needs renewing every 3 years

Cons:

• You can only nominate one beneficiary, no splitting between multiple people
• Less flexible than a BDBN for complex estates or blended families
• Must generally be set up when the pension starts, you usually can't add it to an existing pension later, check your fund's rules, since SMSFs may have more flexibility
• May not suit couples where both spouses already have large pensions close to their TBC

Whether it's right for you depends on your super balance, your spouse's TBC position, and your broader estate plan. A financial adviser who specialises in super can model the numbers for your situation.

❓ Frequently asked questions🔗