Case studies: Super death benefit nominations

Case study 1: Transfer balance cap implications

Ramona and Luis have account-based pensions with balances of approximately $1.3 million each. They have nominated one another as reversionary beneficiaries.

Ramona passes away and Luis inherits her pension. Under the arrangments for reversionary pensions, Luis has 12 months from the date of Ramona’s death before the balance of her pension will be added to his transfer balance account.

The delay provides time for Luis to find out his personal transfer balance cap and assess whether the addition of Ramona’s balance will cause him to exceed it. He can take action to withdraw a lump sum or transfer some of his pension back to the accumulation phase to stay under the cap if required. In the meantime, the pension he has inherited continues to accrue tax-free investment returns.

If a BDBN had been used, the 12-month grace period would not apply. If Luis chose to receive Ramona’s balance as a pension its value would be added to his transfer balance account immediately. Any required action to avoid exceeding the transfer balance cap would need to take place before the new pension started.

At a stressful and emotional time, decisions can be difficult, particularly under time pressure. Without a reversionary nomination, Luis could inadvertently take action that may leave him worse off, including by exceeding the transfer balance cap or withdrawing a lump sum that could have been retained in the tax-free pension environment.

Case study 2: 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 to process the death benefit claim. Rosa will need to supply the death certificate, her marriage certificate, and perhaps a declaration that she and Lee had not divorced. After the claim is processed, Rosa will need to advise the fund of how she wishes the benefit to be paid, either as a lump sum, or as a pension. If Rosa is not sure of the option she wishes to choose, there may be a delay while she seeks advice.

If the binding nomination was a lapsing nomination, there is a risk that it may have expired before Lee’s death. In this case, the trustee must seek full details of Lee’s personal circumstances before deciding the appropriate recipient for his balance, which can take many months.

It is possible for a binding nomination that has not expired to be found invalid at the time of death, triggering the same process as for an expired nomination. This can occur if the nomination was not appropriately witnessed or dated, but super funds have processes to check for errors and request corrected forms before adding nominations to accounts, so it is uncommon.

Rosa will have a shortfall of $4,000 per month until the claim is processed, including any time she takes to decide on a pension vs a lump sum and any delay caused if the nomination has expired.

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

Case study 3: 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 $150,000. 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 $481,500 assets 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 $321,500. 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 would remain intact, at least until the LPR decided what to do with Janet’s super.

Case study 4: Estate planning considerations

Paul is 65 and Fiona is 63. They have a son, Colin, who is 19. Paul also has a 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; Fiona then becomes very ill 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. Then when Fiona later 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.