A reversionary ABP continues automatically to the surviving spouse without triggering a new commencement. For grandfathered ABPs (commenced before 1 January 2015), this preserves the deduction-method income test treatment — assessed on income drawn, not a deemed return on capital. A non-reversionary ABP ceases on death; any new pension commences after 2015 and is assessed under deeming. The difference can be thousands of dollars per year in Age Pension.
For Australian pensioner couples with account-based pensions (ABPs), the choice between a reversionary and a non-reversionary structure is often made at pension commencement and rarely revisited. Yet on the first death in the couple, this single decision can substantially affect the surviving spouse's Age Pension entitlement — particularly for grandfathered ABPs where the income test treatment under the deduction method is materially more favourable than the deeming assessment that applies to new income streams. The reversionary nomination is, in many cases, one of the highest-value decisions a couple with a substantial account-based pension can make.
What is the difference between reversionary and non-reversionary pensions?
A reversionary account-based pension is structured so that on the pensioner's death, the pension automatically continues to the nominated surviving spouse — without interruption, without the pension balance paying out as a death benefit, and without triggering a new pension commencement. The surviving spouse steps into the shoes of the original pensioner, continuing under the existing pension product.
A non-reversionary ABP ceases on death. The balance is paid as a death benefit — either as a lump sum to the estate or a nominated beneficiary, or as a new death benefit pension commenced in the surviving spouse's name. If a death benefit pension is taken, it is a new product with a new commencement date.
What is the grandfathering issue for account-based pensions?
The pivotal Age Pension consequence of this structural difference applies to ABPs commenced before 1 January 2015 — the "grandfathering" date introduced by the Social Security Legislation Amendment (Fairer Means Testing of Account-Based Pensions) Act 2014. Account-based income streams that were already in place before that date, and that were already being assessed under the deduction method, were grandfathered to continue on that basis. The deduction method calculates a "deductible amount" — essentially the original purchase price divided by the ABS life expectancy at commencement — and subtracts this from the annual pension income before applying the income test. The result is that only the income component of the pension is assessed, not a deemed return on the capital.
Account-based income streams that commenced from 1 January 2015 onwards are assessed under deeming: Centrelink applies the standard deemed rates to the account balance as a financial asset, regardless of actual income drawn. At current deeming rates of 1.25% below the threshold and 3.25% above (effective 20 March 2026, DSS Guide 4.4.1.10, https://guides.dss.gov.au/social-security-guide/4/4/1/10), a substantial ABP balance can produce meaningful deemed income.
What happens on the first death in the couple?
For a reversionary nomination, the pension continues to the surviving spouse under the existing product. The grandfathering status of the pension carries across with it — the deduction method continues to apply if it was applying before death. Centrelink re-assesses the surviving spouse's pension entitlement on the transition to single thresholds and single rates, but the income test treatment of the ABP itself is preserved.
For a non-reversionary structure, even if the surviving spouse chooses to take the death benefit as a pension rather than a lump sum, the new pension is a new product commencing after 1 January 2015. It is assessed under deeming, not the deduction method. The grandfathering of the original pension is lost.
What does a worked example look like?
Consider a couple, both aged 75, where one partner holds a grandfathered ABP commenced in 2014. The ABP balance is currently $600,000. The original purchase price at commencement was $650,000; the ABS life expectancy at commencement (say, age 64) was approximately 22 years, giving a deductible amount of approximately $29,500 per year. The annual pension drawdown is $35,000. Under the deduction method, the income test counts only $35,000 minus $29,500 = $5,500 of income from this pension.
Under deeming at current rates (single person, single threshold $64,200 at 1.25%; remaining $535,800 at 3.25%), the same $600,000 balance would produce deemed income of approximately $18,200 per year ($802 on the below-threshold amount plus $17,414 on the above-threshold amount). The difference — $5,500 assessed under deduction versus $18,200 assessed under deeming — is $12,700 per year of additional assessed income. At the income test taper rate (currently 50 cents of pension per dollar of income above the threshold), this represents approximately $6,350 per year less in Age Pension for the surviving spouse if grandfathering is lost.
Over ten or fifteen years of surviving spouse life expectancy, the cumulative impact runs to $63,000 to $95,000 in foregone pension at current rates. And this is before accounting for further rate changes, indexation, and other factors. The reversionary nomination is not a technicality; it is a decision with a dollar value that can comfortably exceed the cost of any financial advice.
How does the assets test change on the first death?
Whether or not a reversionary nomination is in place, the transition from couple to single assessment on first death has its own Age Pension consequence. Couple thresholds for the Age Pension assets test are higher than single thresholds in absolute terms, but the couple combined rate applies — on first death, the surviving spouse moves to single thresholds with the single rate. A pension that was comfortably within the couple thresholds may be above the single threshold. This is a separate consideration from the reversionary/grandfathering question, but it compounds the importance of modelling the surviving spouse's position in advance.
What practical steps should couples take?
Confirming reversionary nominations on all ABPs is a straightforward exercise. The fund administrator can confirm the current reversionary status, and most funds allow updates to nominations (subject to trust deed provisions and applicable law). The reversionary nomination should be consistent with the binding death benefit nomination where one is in place — these are different mechanisms, but they should align with the couple's intended outcome.
For couples with any grandfathered ABPs, the reversionary nomination is worth confirming as a priority. For couples where circumstances have changed since the original nominations were made — a separation and new relationship, a significant change in assets, a death of the nominated beneficiary — an updated review is warranted. The effort is minimal; the potential impact is substantial.
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Key takeaways
- A reversionary account-based pension (ABP) continues automatically to the surviving spouse on the pensioner's death. No new commencement occurs, no death benefit is paid out, and the pension continues under the existing product. The grandfathering status of the pension carries across to the surviving spouse with no interruption.
- ABPs commenced before 1 January 2015 were grandfathered under the deduction method for the Age Pension income test. The deduction method is more favourable than deeming for large balances — it assesses only the income drawn minus the deductible amount (original purchase price divided by life expectancy at commencement), rather than applying deemed rates to the full account balance.
- If the pension is non-reversionary and the surviving spouse takes a new death benefit pension, that new pension commenced after 1 January 2015 and is assessed under deeming. At a $600,000 ABP balance, the difference between deduction-method and deeming assessment can be approximately $12,700 per year in additional assessed income — costing approximately $6,350 per year in foregone Age Pension.
- The assets test also changes on the first death regardless of reversionary structure. The surviving spouse moves from couple to single thresholds. A pension balance within couple thresholds may now exceed single thresholds, further reducing pension entitlement. Both the reversionary/grandfathering issue and the threshold transition should be modelled together.
- Confirming reversionary nominations on all ABPs is a low-cost exercise with potentially high-value implications. The fund administrator can confirm current reversionary status and nominations can usually be updated. For couples with any grandfathered ABP, this review should be a priority.
Frequently asked questions
What is a reversionary account-based pension?
A reversionary ABP is structured so that on the pensioner's death, the pension automatically continues to the nominated surviving spouse — without the balance being paid out as a death benefit and without a new pension being commenced. The surviving spouse steps into the original pensioner's position, continuing under the same pension product. By contrast, a non-reversionary ABP ceases on death, and the surviving spouse who wants to retain the balance in pension form must commence a new pension.
Why does the reversionary nomination matter for the Age Pension?
For ABPs commenced before 1 January 2015 (grandfathered pensions), the income test uses the more favourable deduction method rather than deeming. A reversionary nomination preserves this grandfathered treatment when the pension passes to the surviving spouse — the deduction method continues applying, not deemed rates on the full balance. If the pension is not reversionary and the surviving spouse commences a new pension, that new pension is post-2015 and is assessed under deeming, which can be materially less favourable for large balances.
How much can a grandfathered reversionary nomination be worth?
In a worked example with a $600,000 grandfathered ABP: the deduction method produces $5,500 of assessed income, versus approximately $18,200 under deeming. The $12,700 difference, at the income test taper rate of 50 cents per dollar, equates to approximately $6,350 per year less in Age Pension if grandfathering is lost. Over a 10-to-15-year surviving spouse life expectancy, the cumulative impact can exceed $60,000–$95,000.
What happens to the assets test when one spouse dies?
On the first death in a couple, the surviving spouse transitions from couple thresholds to single thresholds for the Age Pension assets test. Single thresholds are lower in absolute terms, and the surviving spouse holds only a single-person entitlement. A pension balance comfortably within couple thresholds may now push the surviving spouse above the single upper threshold. This compounds the grandfathering issue and should be modelled as part of the surviving spouse's total position.