Structuring Your Super: Reversionary Pensions, Tax & Drawdowns

There is more to superannuation than building up your balance for retirement. Your superannuation structure, how you draw it down, and how it gets passed on when you die can have important tax implications for you and your beneficiaries.

This is particularly important when considering how your super may pass to a spouse or, eventually, to adult children. Reversionary pensions, Binding Death Benefit Nominations (BDBNs), the transfer balance cap and Division 296 each carry different tax implications, regulatory requirements and planning considerations that can influence how your super is structured, managed and ultimately passed on to your beneficiaries.

Understanding how all of these different elements interact with each other can help you to make better-informed decisions about the structure of your superannuation and estate planning.

What is a reversionary pension?

A reversionary pension is a superannuation income stream that, upon the member’s death, automatically continues to a nominated eligible beneficiary, commonly their spouse.

Couples may nominate each other as reversionary beneficiaries. If one spouse dies, their pension continues to be paid to the surviving spouse.

A reversionary pension is different from a Binding Death Benefit Nomination (BDBN). A BDBN provides binding instructions to the super fund trustee about who receives the death benefit covered by the nomination.

Importantly, it is not necessarily a case of choosing one or the other. A person may have both a reversionary pension and a BDBN applying to different superannuation interests.

For example:

Pension account: $1 million, with their spouse nominated as the reversionary beneficiary.
Accumulation account: $300,000, covered by a BDBN directing the death benefit to their spouse or another eligible beneficiary.

Where a pension has a valid reversionary beneficiary, it may automatically continue to that beneficiary following the member’s death. A BDBN may still determine what happens to other superannuation interests that are covered by the nomination.

When may a reversionary pension be preferred to a binding death benefit?

Where the intended beneficiary is a spouse who is eligible to receive a pension, you may prefer a reversionary pension. One consideration is the treatment of the pension under the transfer balance cap rules.

The Transfer Balance Cap Explained

The transfer balance cap limits the amount of superannuation that can be transferred into the retirement phase. This is because investment earnings within the retirement phase are generally tax-free.

When an eligible beneficiary receives a reversionary pension, the value of the deceased’s pension generally does not create a credit in the beneficiary’s transfer balance account until 12 months after the date of death.

This gives the beneficiary time to review their circumstances and make any necessary changes before the credit arises.

Depending on their circumstances, they may be able to commute part of their own pension back to accumulation phase. Or, they may take amounts out of the superannuation system to remain under their personal transfer balance cap.

The rules can differ for non-reversionary death benefit income streams, so the appropriate structure will depend on the individual’s circumstances.

Division 296 Explained

Separate to the transfer balance cap, Division 296 introduces further considerations for individuals with larger superannuation balances.

From the 2026–27 financial year, Division 296 increases the tax on superannuation earnings for individuals with balances above $3 million. There is a further threshold at $10 million. Consider the following example: 

Spouse A has $2 million in superannuation, paid as a pension. 
Spouse B has $2 million in superannuation.

Individually, each has a total superannuation balance below the $3 million Division 296 threshold.

However, if Spouse A dies, and their pension gets reverted to Spouse B, Spouse B’s total superannuation balance may now be $4 million, bringing them above the $3 million Division 296 threshold. This could result in additional tax applying to a proportion of their superannuation earnings.

Understand the Measurement Dates

Unlike the transfer balance cap treatment of a reversionary pension, Division 296 does not provide the same 12-month delayed credit. Division 296 instead applies by reference to an individual’s total superannuation balance at the relevant measurement dates and their taxable superannuation earnings.

There is also special transitional treatment for the 2026–27 financial year, with liability for that year determined by reference to total superannuation balance at the end of the income year. The rules applying to deaths also change from 1 July 2027.

For couples with significant combined superannuation balances, this makes it particularly important to consider how a reversionary pension could interact with Division 296 as part of their broader retirement and estate planning.

Could the order you draw down your superannuation affect the tax your beneficiaries pay?

To understand why the order in which you draw down your super can matter, it is first helpful to understand the different components that can make up a superannuation interest.

Broadly, superannuation can contain:

Tax-free component: This can include amounts arising from non-concessional contributions. This component is generally tax-free when paid as a superannuation death benefit.

Taxable component: This can include amounts arising from concessional contributions and earnings within the fund. The tax treatment of this component following death can depend on who ultimately receives the benefit.

An important distinction here is whether the recipient qualifies as a death benefits dependant for tax purposes.

Understanding Death Benefits Dependants

Superannuation law and tax law use different definitions of a dependant for different purposes. Superannuation law determines who a super fund is permitted to pay a death benefit to, while tax law determines how that benefit is taxed when it is received.

For example, a spouse will generally qualify as a death benefits dependant for tax purposes and can generally receive both the tax-free and taxable components of a lump sum super death benefit tax-free.

An adult child, however, will not generally qualify as a death benefits dependant for tax purposes unless they meet additional criteria, such as being financially dependent on the deceased. Where an adult child is not a death benefits dependant for tax purposes, tax may apply to the taxable component of the death benefit.

This distinction can make the composition of the superannuation remaining at death particularly important.

Where does drawing down come into the picture?

Consider someone who has two separate pension interests:

Pension A: $300,000, predominantly taxable component.
Pension B: $300,000, predominantly tax-free component.

They need to withdraw $200,000 during retirement.

If more of that $200,000 is withdrawn from Pension A, they may reduce the amount of taxable component remaining in their superannuation.

If their remaining super ultimately passes to adult children who are not death benefits dependants for tax purposes, preserving an interest with a higher proportion of tax-free component may reduce the amount of tax payable on the eventual death benefit.

While withdrawals from a particular superannuation interest generally reflect the tax-free and taxable proportions of that interest, choosing which interest to draw from can still affect the overall composition of the superannuation that remains.

In other words, it is not necessarily just how much superannuation remains that matters. The proportion that is tax-free versus taxable may also affect the eventual tax outcome for beneficiaries.

How could this work between spouses?

This can also become relevant where a couple has superannuation interests with significantly different tax-free and taxable proportions.

For example, imagine a couple respectively holds:

A superannuation interest that is 20% tax-free, and
A superannuation interest that is 60% tax-free.

Depending on their circumstances, drawing more heavily from the interest with the lower tax-free proportion may reduce the taxable component remaining within super over time.

If the surviving spouse qualifies as a death benefits dependant for tax purposes, a super death benefit they receive will generally be tax-free to them. They may then have further decisions to make about how the superannuation is managed or withdrawn.

If the remaining superannuation ultimately passes to adult children who are not death benefits dependants for tax purposes, however, the taxable component becomes more significant.

Preserving an interest with a higher tax-free component could therefore mean a greater proportion of the remaining superannuation can ultimately be passed to those beneficiaries without tax applying to that component.

The appropriate strategy will depend on the individual’s circumstances, including their retirement income needs, superannuation structure, intended beneficiaries and the tax components of their super.

Bringing Your Superannuation Strategy Together

Superannuation planning is not a conversation to leave for later. As we’ve seen, the way your super is structured and how it is drawn down can influence the tax obligations you or your beneficiaries may face.

Reversionary pensions, BDBNs, the transfer balance cap, Division 296 and the tax components within your superannuation do not operate in isolation. Considering these issues together can help identify potential problems early and provide opportunities to structure your affairs more effectively.

At Aintree Group, our integrated professionals can help you consider your superannuation, retirement and estate planning strategies together By looking at how these different areas interact, we can help identify potential issues and opportunities and ensure your plans reflect both your needs today and what you want to leave behind for the people you care about most.

Reach out to our team today to get started.

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