Case studies: Super death benefit nominations

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Make a preferred/no nomination
Make a death benefit nomination
Make a reversionary nomination (pension accounts only)
Choosing between a reversionary pension and a BDBN

What happens to your super after you pass away? As super does not automatically form part of your estate, it can’t be dealt with via your Will. So how do you ensure your super passes to your loved ones in the way you would wish?

This article will focus on people with retirement phase super pension accounts and their death benefit nomination options.

Often there is confusion between the different types of nominations and which one to put in place. Given everyone’s situation is different, there is no one-size-fits-all solution.

Generally, you have three options:

Make a preferred/no nomination
Make a death benefit nomination
Make a reversionary nomination

Learn more about different death benefit nominations.

Make a preferred/no nomination

Making a preferred nomination is not usually offered by all super funds. SMSFs can have this in place if the trust deed allows it. In this, you are asking the super fund trustee to consider your beneficiaries along with other information but the trustee is not bound by it.

If you do not make any nomination, the trustees will have the discretion to pay the death benefit.

Make a death benefit nomination

There are different types of death benefit nominations.

Binding death benefit nominations (BDBNs) are nominations where the trustee of the super fund must pay your super death benefit to the beneficiaries you nominate, in the proportions you listed in your nomination. However, if your binding nomination is not valid at the time of your death, the super funds trustee ends up with the final discretion.
Non-binding death benefit nominations are ones where the trustee of your super fund will look at the benefit nomination you make, but it still retains the final say over which of your beneficiaries receives your super and in what proportions.
Lapsing or non-lapsing. Both binding and non-binding death benefit nominations can be lapsing or non-lapsing. A lapsing nomination generally automatically lapses after three years and needs renewal whereas a non-lapsing nomination does not lapse automatically and remains in place until you cancel it or replace it with a new binding death benefit nomination.

Make a reversionary nomination (pension accounts only)

If you start a new pension or income stream, your super fund may allow you to make a reversionary nomination. Unlike a death benefit nomination, under a reversionary nomination your income stream automatically reverts to your beneficiary, usually your spouse, who starts receiving the regular pension payment instantly after your passing. The super fund trustee has no discretion and must follow your instructions.

Usually, reversionary nominations can only be made when you start a super pension. So, if you already have a pension in place you may need to stop and restart it to make it reversionary, which can pose risks, so it is important to seek professional advice before you act.

Choosing between a reversionary pension and a BDBN

If you have a pension, then usually a reversionary pension or a BDBN (especially a non-lapsing one) provides the most certainty in terms of making sure your super passes on according to your wishes. However, there are certain key differences between them that need to be considered.

Let’s try to understand these differences with case studies.

Case study 1: Administrative differences

Lee and Rosa are in their early 70s and their main financial asset is their account-based pension. Lee withdraws a pension of $4,000 per month and Rosa $1,000 per month because her super balance is lower than Lee’s. They spend the full $5,000 every month and are dependent on that income.

They have nominated each other in a BDBN on their pension accounts.

Lee passes away and his pension payments of $4,000 a month are stopped because a BDBN is only tested for validity when a member’s death benefit becomes payable. This could take weeks or months, especially if the nomination contains errors. Some common errors include BDBNs not signed or the beneficiary signing as a witness. So, Rosa has a shortfall of $4,000 per month until the BDBN is approved by the trustee. If the trustee deems the BDBN invalid, then this may prolong the issue further.

If they had a reversionary pension nomination in place, the super fund trustee must revert the pension to Rosa immediately, saving time and administrative effort. Usually, only Lee’s death certificate would need to be provided.

Case study 2: Social security considerations

John and Janet are in their late 70s and receive pension payments from their account-based pensions and also receive the full Centrelink Age Pension. John’s pension balance is $250,000 and Janet’s is $100,000. They have one car worth $10,000 and no other assets, except their home.

They are tested under the assets test for the Age Pension and are currently under the $419,000 asset limit.

They have made reversionary pension nominations to each other on their account-based pensions. Janet passes away and her pension reverts to John. However, John will now be assessed under the assets test as a single person and not as part of a couple, even though the level of assets is unchanged for him. The current assets test limit for a single person is $280,000. This tips John over the assets test limit for a full Age Pension. He will now receive a part Age Pension instead.

In this case, if they had nominated their Legal Personal Representative (LPR)/Estate in a BDBN, Janet’s super would have passed to her estate instead of John and his full Age Pension remain intact, until at least the LPR decided what to do with Janet’s super.

Case study 3: Social security considerations

Paul is 65 and Fiona is 63. They have a son together, Colin, who is 19. Paul also has one daughter from his previous marriage, Rachel, who is 29. Paul has an account-based pension of $1,500,000 and has nominated Fiona in a BDBN because he wants his super to go to Fiona (and eventually to Colin).

Paul has a large investment portfolio of $1,000,000 outside super that will be inherited by Rachel when he dies, as per his Will. Paul’s Will does not make any provisions for Colin but Fiona’s Will makes a provision for him as sole beneficiary.

Paul passes away suddenly due to a heart attack after which Fiona becomes very ill too and passes away within a couple of weeks. Since Fiona is no longer alive, Paul’s pension cannot be paid to Fiona. The super fund’s default provisions state that the deceased member’s death benefit is to be paid to the LPR. So, Paul’s pension forms part of his estate, which is dealt with via his Will and ultimately benefits Rachel who may not share her inheritance with Colin.

In this case, if Paul had nominated Fiona as a reversionary pensioner, his pension would revert to Fiona immediately. Later, after Fiona passed away, that pension would form part of her estate and would eventually benefit Colin. Rachel too would receive her inheritance from the provision in Paul’s Will.

Making a super death benefit nomination may seem straightforward but given the complexity around superannuation rules, estate planning rules and individual circumstances, it can become complex.

Super idea: With so much at stake financially and in terms of avoiding family conflict, it is important to consult professionals such as a licensed financial adviser and an estate planning lawyer to determine which super death benefit nomination will deliver your desired outcome.