As you approach retirement, it is crucial to ensure that your superannuation is structured in a way that provides security for your loved ones in the event of your death. Two key mechanisms are available within superannuation to manage this process; Binding Death Benefit Nominations (BDBNs) and Reversionary Pension Nominations. Both options serve to direct the distribution of your super upon your death, but they operate differently and have unique advantages and disadvantages. Understanding these distinctions will help you make an informed decision about which approach is best suited to your needs—or if a combination of both might be appropriate.

What is a Binding Death Benefit Nomination (BDBN)?

A Binding Death Benefit Nomination (BDBN) is a formal, legally-binding directive that allows you to specify who will receive your superannuation benefits upon your death. It can apply to money held in both an accumulation fund and a pension account. The nomination must be made in writing, signed, and witnessed by two independent individuals. The primary purpose of a BDBN is to provide certainty regarding the distribution of your super, especially if you are part of a public super fund, where trustees may not be familiar with your personal circumstances.

Advantages of a BDBN:

• Certainty: Your superannuation benefit is distributed according to your clear instructions, which is particularly important in public super funds. The trustees are bound to follow your nomination, ensuring your wishes are honoured.
• Broad Application: A BDBN can relate to your superannuation balance, any life insurance linked to it, and pension accounts, providing a comprehensive approach to estate planning.
• Estate Planning Flexibility: If you wish to leave your superannuation to someone other than a dependent, such as a sibling or a friend, you can nominate your legal personal representative (estate), allowing the benefit to be distributed through your will.

Disadvantages of a BDBN:

• Rigidity: A BDBN is legally binding and may not provide flexibility for changing circumstances. For example, if the nominated beneficiary predeceases you, you would need to update the nomination or risk your super being distributed according to the fund’s default process.
• Expiration: In some cases, BDBNs can expire after three years (for non-lapsing nominations), meaning you would need to renew them regularly to ensure they remain valid.

What is a Reversionary Pension Nomination?

A Reversionary Pension Nomination allows you to nominate a beneficiary—typically your spouse—who will automatically continue to receive your pension payments after your death. This ensures that the income stream from your pension does not cease and that the transition is seamless for your surviving spouse.

Advantages of a Reversionary Pension Nomination:

• Continuation of Income: Upon your death, the pension continues uninterrupted for your spouse, providing financial stability and income security.
• Tax Planning Benefits: A reversionary pension comes with a 12-month window during which the beneficiary can consider how to combine their super with the reversionary pension. This is especially important if the total amount exceeds the Transfer Balance Cap, which limits the amount of super that can be held in a tax-free pension account.
• Flexibility for the Beneficiary: The reversionary pension recipient has the option to either continue receiving the pension or withdraw some or all of the balance as a lump sum. This flexibility allows them to tailor the distribution to their needs.

Disadvantages of a Reversionary Pension Nomination:

• Limited to Pensions: A reversionary nomination applies only to pension accounts and not to accumulation accounts or other assets within your super fund.
• Potential Complexity in SMSFs: If you are a member of a self-managed super fund (SMSF), the reversionary pension process can be more complex, as it may interact with other estate planning elements, such as control of the fund and the transfer of trusteeship.

Should You Choose One or Both?

While both BDBNs and reversionary pension nominations serve to direct how your superannuation benefits are handled after death, they are not mutually exclusive. In fact, many retirees opt to use both mechanisms in tandem. A BDBN can cover any funds held in accumulation or tied to life insurance, while a reversionary pension nomination can ensure the continuation of a pension for your spouse.

For instance, if you have a significant balance in accumulation but are also receiving a pension, you could make a BDBN to ensure your accumulation funds are directed according to your wishes, and a reversionary pension nomination to provide for your spouse’s financial security through an ongoing pension income.

Timing Considerations

• BDBN: Experts recommend putting a BDBN in place as soon as possible, especially if you are a member of a public super fund where trustees are less likely to be familiar with your personal circumstances.
• Reversionary Pension: The ideal time to make a reversionary pension nomination is when you commence a retirement pension from your super. This ensures that the nomination is in place before your pension begins, providing peace of mind for your spouse.

Special Considerations for SMSFs

If you are a member of an SMSF, the decision may require more nuanced planning. SMSF members often have greater control over the payment of benefits after death, particularly if the surviving spouse is the sole remaining member of the fund. In such cases, formal death benefit nominations may not always be necessary, as the surviving partner has the discretion to manage the distribution of benefits, which could allow for greater flexibility.

However, for SMSFs where control of the fund may pass to someone outside the immediate family, formal death nominations are recommended to avoid any disputes or unintended outcomes.

Conclusion

Both Binding Death Benefit Nominations and Reversionary Pension Nominations are valuable tools in estate planning for superannuation. A BDBN provides certainty and ensures that your wishes are followed, while a reversionary pension nomination can offer your spouse continued financial security through a pension. Depending on your circumstances, you may benefit from incorporating both into your retirement and estate planning strategy.

For personalised advice, please contact Cadre Capital Partners.