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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
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.
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.