Your account based pension will play an important part in your estate planning, and you'll need to think about what would happen if you were to die while there's still money in your account, such as:

• who will get the benefit?
  
  
• will it be paid as a lump sum or a pension?
  
  
• how will it be taxed?

The options vary from one provider to another. In some cases you have little influence, but with the help of your financial planner you can have a lot of control over what happens and your account based pension can become a very flexible financial planning tool.

The following options are common:

Binding Option

With this option, you direct the trustee to pay death benefits to one or more of your dependents or to your estate. The trustee will normally decide if that's in lump sum or pension form, although in some cases the recipient may be able to request how the benefit is to be paid to them. With many providers, binding nominations lapse every three years and have to be renewed, but some other providers may allow you to make a binding nomination that remains effective until you choose to update or amend it.

Discretionary Option

With this option the trustee has the discretion to pay death benefits to one or more of your dependants or to your estate. Your 'dependants' are your spouse, child or other person financially dependent upon you. You can advise who you'd like to receive the benefit, but you can't direct the trustee to follow that advice.

The trustee will also have discretion as to whether to pay the benefit as a lump sum or a pension, although in some cases the recipient may be able to request how the benefit is to be paid to them.

Reversionary Pension Option

With this option you nominate a reversionary pensioner, who must be one of your dependants, to continue receiving your pension benefit. Normally they'll be able to convert it into a lump sum if they prefer. This option is binding and does not leave any discretion to the trustee.

How are the benefits taxed?

The tax treatment varies depending on who receives the benefit and whether it is paid as a lump sum or pension, among other factors. Contact your Prime Time financial adviser to obtain details of different tax treatments that may apply.

Differences Between Disretionary and Reversionary Options

The main differences are:

• The key difference with the discretionary option is that you have no control over who will receive the benefit.
  
  
• The key difference with the reversionary pension option is that the tax-free deductible amount of your pension is calculated differently and will often be lower.

Reproduced with the kind permission of Macquarie Investment Management Limited

Copyright © 2007 Forsyte Consulting Pty Ltd unless otherwise stated.