Lets take a look at the key differences and considerations when deciding whether to have an automatically reversionary nomination, or a binding / non-lapsing death benefit nomination for account based income streams.

Options for Super Death Benefit Nominations

Under superannuation legislation, members commencing an account based pension have several options (subject to the fund’s governing rules) for death benefit nominations. The most common are:

• Automatic reversion nomination
• Binding death benefit nomination

Important note: SIS death benefit payment standards

Regardless of the type of nomination selected, the SIS death benefit payment standards always apply. Broadly, the SIS death benefit payment standards require:

• death benefits to be paid only to dependants or the member’s legal personal representative (LPR) in almost all cases
• death benefits paid to a member’s LPR, or adult children (unless under 25 and financially dependent, or disabled) to be paid as a lump sum.

Any nomination that would otherwise require these rules to be breached is invalid.

Reversionary Nominations

The SIS Regulations specifically allow account based pensions that are payable for the life of both a primary and reversionary beneficiary. Members can therefore, commence an account based pension that automatically reverts to a reversionary beneficiary upon the pensioner’s death.

In simple terms, the reversionary pensioner will automatically continue receiving the pension payments in the event of the primary pensioner’s death.

Advantages of Reversionary nominations

Reversionary pensions have a number of practical advantages over non-reversionary pensions. These include:

• The trustee is bound by the requirement to revert the pension to the reversionary beneficiary, which can save time and effort as there is no trustee discretion regarding either to whom the benefit may be paid or whether it is to be paid as a lump sum or pension.
• There is less paperwork likely to be required upon death in the case of automatic reversion. A death certificate and relationship declaration along with trustee minutes confirming the member’s death and reversion of the pension is all that is likely to be required.
• There is no requirement for the reversionary pensioner to receive a pro-rata minimum pension payment for the first part of the financial year of the pension following the pensioner’s death (the pensioner’s minimum, calculated at 1 July of the financial year, continues to apply for the entire year).
• Reversionary beneficiaries of account based pensions generally have an advantage under the transfer balance cap rules, as they have additional time with which to arrange their affairs (eg, roll part of their existing retirement phase benefits back to accumulation phase), and generally allows them to keep more in retirement phase for longer.

Considerations for Reversionary nominations

• In most cases, you can only make a reversionary nomination when you start a super pension. So, you need to decide from the start, whereas binding death nominations can be updated, changed, added at any point.
• Reversionary pensions to a spouse may make them ineligible for Age Pension upon the death of a pensioner. This is because the surviving spouse can often find themselves assessed against a single person’s income and assets test thresholds, while retaining the same level of assets and income as when they were a couple.

Binding Death Benefit Nominations

A binding death benefit nomination enables the client to specify which SIS dependant(s) they want to receive their super death benefit and (usually) in what proportions. A binding nomination can also be used to direct the death benefit to the Legal Personal Representative (LPR).

A binding death nomination can provide more choice in how to receive the death benefit as a lump sum or, if eligible, a pension, depending on the rules of that fund.

Advantages of Binding Death Nomination

• A binding nomination will be more appropriate if a client wants to nominate more than one SIS dependant. With a reversionary beneficiary nomination, a single eligible beneficiary can only continue the income stream.
• A binding nomination can be more suitable if members want to give their SIS dependants the flexibility to decide whether to receive the death benefit as a lump sum or (where eligible) an income stream.

Considerations for Binding Death Nomination

• Where a couple dies at the same time, a reversionary pension can ensure their estate planning wishes are carried out as intended, while a binding death benefit nomination may lead to unintended consequences.
• Binding death nominations may be readily accepted by the trustee when made, but may not be tested for validity until a member’s death benefit becomes payable. This is more likely to occur in an SMSF where the SMSF’s governing rules may have specific criteria for making a valid binding death nomination.

Which option is better for you?

It really depends.

There are several differences and considerations when deciding whether to put in place a reversionary nomination when commencing a new superannuation income stream or simply putting in place a binding or non-lapsing nomination.

When assessing which type of nomination is appropriate, you should consider your specific circumstances, including need for flexibility and other factors such as grandfathering of an account based pension for social security purposes and the ability to amend the type of nomination without having to restart the income stream.

In making a decision the most important thing is to make sure you have thought through the implications and how this fits in with your broader estate planning strategy.

Got some questions?

If you’ve got any questions about reversionary pensions and binding death benefit nominations, please book a chat with one of our financial planners.