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Michelle Bromley CFP®, Director & Private Client Adviser – Strategy and Advice
Important: The following article provides factual information about superannuation estate planning only and is not intended to be construed as legal advice. Prime strongly recommends you seek professional and independent legal advice from a suitably qualified and experienced estate planning lawyer.
When it comes to estate planning, superannuation often plays a pivotal role. Many assume their super automatically forms part of their estate, but the reality is more complex. Superannuation is held in a Trust and governed by its own rules, meaning your intentions may not be carried out unless you plan carefully.
Two key tools in this process are Reversionary Pensioner and Death Benefit Nominations (DBNs).
Why Superannuation is Different
Superannuation benefits do not automatically flow via your Will. Instead, the trustee of your super fund decides how your death benefits are distributed—unless you have valid nominations in place. These nominations determine to whom benefits are paid.
Generally, death benefits can be paid as a lump sum to an eligible dependent or to your estate, or as an income stream to an eligible ‘death benefits dependent’ such as your spouse.
Nomination Options Explained
The superannuation law and your fund’s trust deed allow for several different forms of nomination:
1. Reversionary Pensioner – only available for pension phase accounts, this allows your pension to continue to your nominated ‘death benefits dependent’ (e.g. spouse, financially dependent child under age 25, or person with whom you have an interdependency relationship). A key advantage is that the income stream continues almost seamlessly, keeping assets in the tax-free pension environment. This also provides a 12-month period for the recipient to plan for any transfer balance cap issues.
2. Binding Death Benefit Nomination – a legally enforceable direction to the trustee to pay your benefits to eligible dependents or your estate. Must be signed and witnessed by two independent adults and renewed every three years. A key advantage is you have certainty and control over whom your benefits are paid to.
3. Non-lapsing nomination – similar to a binding nomination but does not expire, the superfund Trustee agrees to be bound by your nomination which, if valid, remains in place unless revoked. A key advantage is longevity of your nomination, but requires regular review to ensure it remains valid and reflects your wishes.
4. Non-Binding Nomination – indicates your preference but the Trustee retains discretion, considering the relevant circumstances. A key advantage is flexibility, particularly where the trustees are known to you i.e. your self-managed superfund where your spouse or family take control and are more likely to follow your wishes. However, a key risk is benefits may flow in a manner that wasn’t intended.
5. No Nomination (Trustee Discretion) – if you fail to make a nomination or your nomination becomes invalid, the Trustee decides. The Trustee is generally obliged to identify your dependents and make appropriate provision for them, considering the relevant circumstances. The decision-making process often results in delays and my result in unintended outcomes. Typically, public offer funds will adopt a default position which may be to pay benefits to your estate for distribution via your Will.
Common Pitfalls
A nomination must be valid at the date of your death, and should continue to reflect your wishes. This can pose an issue in circumstances such as:
· Nominated beneficiary predeceases you
· Life changes (e.g. divorce) invalidate your wishes
· Failure to renew a binding nomination
· Nominating someone who is not an eligible dependent under superannuation law
· Tax surprises when taxable benefits are paid to non-tax-dependents
Tip: review your nominations every 3 years and after major life events.
Reversionary Pension vs Death Benefit Nomination
A Reversionary Pension offers several advantages:
· Flexibility for the nominated beneficiary to take a pension or a lump sum
· Smoother transition as the income stream reverts without trustee discretion delays
· Tax efficiency of retaining benefits in the tax-free pension phase
· Transfer balance cap timing as the value at date of death is not credited to the recipient’s cap until 12 months after death, giving time to restructure benefits to remain within the cap
Important: Most funds won’t allow both a Reversionary Pension and a Death Benefit Nomination for the same account. Where both exist, the Reversionary Pension Nomination usually takes priority. You should review whether a Reversionary Pension or a Beneficiary Nomination is the most appropriate option for your circumstances.
Which strategy is right for you?
It is important to discuss your overall estate plan with a suitably experienced estates lawyer to determine the right nomination(s) for your circumstances.
For those with more complex arrangements, a combination of reversionary pension nomination and death benefit nomination(s) may be needed -for example:
· Taxable components to a tax-dependent (tax free)
· Tax-free components to non-tax-dependents
What to do?
Discuss your options with your financial adviser and an experienced estate planning lawyer. We can refer you to a trusted legal specialist upon request.
The information in this article contains general advice and is provided by Primestock Securities Ltd AFSL 239180. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read the Product Disclosure Statement (PDS) before making any decision to acquire any financial product referred to in this article. Please refer to the FSG (www.primefinancial.com.au/fsg) for contact information and information about remuneration and associations with product issuers. This information should not be relied upon as a substitute for professional advice, and we encourage you to seek specific advice from your professional adviser before making a decision on the matters discussed in this article. Information in this article is current at the date of this article, and we have no obligation to update or revise it as a result of any change in events, circumstances or conditions upon which it is based.
