Q: What is the difference between a binding death benefit nomination and a reversionary pension? Should a retail fund offer a reversionary pension option? The forms for my fund only mention binding death nominations.
The terminology surrounding superannuation and death can be confusing and intimidating.
A superannuation death benefit is a payment from a super fund in the form of a lump sum payment (a superannuation lump sum death benefit) or in the form of a pension (a superannuation income stream death benefit).
In plain English, a binding death benefit nomination (BDBN) is an instruction by a fund member on who can receive the fund member’s super benefits, when the fund member dies. The superannuation fund must follow these instructions upon the death of the member.
Note: For a nomination to be binding, a member must nominate that his death benefit be paid to one or more dependants (as defined under the superannuation laws), or is to be paid to the member’s estate.
A dependant as defined under the superannuation laws can be a spouse, or a child of the spouse, or anyone who had an interdependent (interdependency) relationship with the deceased fund member. Any other person who is financially dependent on a member is also treated as a dependant for the purposes of receiving a death benefit from a super account. For information on dependants and non-dependants, and also interdependent relationships, see SuperGuide article Superannuation death benefits: Beware the dastardly death tax, and retirement cap.
Some large super funds offer non-binding death benefit nominations only, which gives the super fund trustees some discretion in how a fund member’s benefits can be paid after death. The opportunity to make a binding DBN within a SMSF is why many individuals concerned about estate planning choose a SMSF rather than a large super fund, although the majority of large super funds are now starting to offer the BDBN option.
Within a BDBN, a fund member can instruct the super fund trustees to pay a pension to death benefit dependants, although such pensions are not considered ‘reversionary’ pensions. A pension commenced on the death of a fund member and payable to a spouse is known as a superannuation income stream death benefit (also known as a death benefit pension).
Now, a reversionary pension is simply a pre-existing income stream/pension payable to a dependant (reversionary beneficiary) on the death of the primary pension fund member. Note that a reversionary pension is not a new pension but simply a redirection of the pre-existing pension to the reversionary pensioner. Typically, reversionary pensions are paid to surviving spouses.
Since a reversionary pension works like a BDBN, creating a separate BDBN is only necessary when a reversionary pension direction is not in place and a fund member seeks to control what happens to his or her super benefits after death.
Important: Not all individuals considered dependants under the super laws can receive a reversionary pension or a death benefit pension. A financially dependent (or financially independent) child aged 18 years or over cannot start receiving a death benefit pension or reversionary pension. A child under the age of 18 can receive such a pension until they turn 25, while a disabled child can receive such a pension indefinitely, regardless of age.
Note: The last part of your question refers to your super fund not offering reversionary pensions. Unless your super fund offers retirement income streams (pensions), and you’re able to take a pension from the super fund when you retire and nominate the option of a reversionary pension (for your eligible dependant/s) at the time you start your super pension, it would not be possible for your super benefits to be paid as a reversionary pension upon your death. You would have to be receiving a pension from your fund as a starting point, and then the rules of your super fund would then have to permit reversionary pensions.
Clear as mud? You may need to have another read of this article, and check out some of the other SuperGuide articles on death benefits and estate planning. Here’s a selection:
- Superannuation death benefits: Who receives super payments, and how much tax is paid?
- Superannuation death benefits: Dear Dad, Tax for everything
- Superannuation death benefits: Beware the dastardly death tax, and retirement cap
- Superannuation death benefits and the $1.6 million transfer balance cap
- SMSF pension earnings remain tax-free after death
- Estate planning: How can an SMSF live forever?
- Anti-detriment payments banned since July 2017
Anyone considering any of the issues discussed in this article should conduct thorough research of their needs and options, and chat to an accountant or superannuation specialist before making any decisions.