Account based pensions: binding vs reversionary nominations

Bobby Woon outlines when a binding or reversionary beneficiary nomination may be more suitable for account based pension clients.

For many clients, their super not only represents a substantial part of their total wealth, it can help ensure their family and certain other beneficiaries are looked after in the event of their death. But unlike many other assets, their super doesn’t form part of their estate and certain restrictions apply to who can receive the death benefit.

In simple terms, a super death benefit can only be paid to a Superannuation Industry (Supervision) Act 1993 (SIS) dependant. These include a:

• spouse;
• child of any age;
• financial dependant;
• interdependent person; and
• legal personal representative of the deceased.

In the absence of certain arrangements, the trustee generally has the discretion to decide which of these dependants will receive the death benefit.

As a result, the death benefit could be distributed in a manner that doesn’t reflect your client’s wishes.

How to remove trustee discretion

One way to remove trustee discretion is for the client to complete a binding death benefit nomination. This is a legal instrument that enables them to specify which SIS dependants they want to receive their super death benefit and (usually) in what proportions.

Provided the nomination is valid, these dependants can receive the death benefit as a lump sum.

However, some SIS dependants will also have the option to receive the death benefit as an income stream.

Where this is done, a new income stream will commence on the client’s death.

SIS dependants who are eligible to receive a death benefit as an income stream include a:

• spouse
• child under 18 years of age
• child aged between 18 to 25 years of age who is financially dependent
• disabled child
• financial dependant (other than a child), and
• interdependent person.

Another option available to clients with account-based pensions is to complete a reversionary beneficiary nomination.

This option enables the client to select who they would like to continue receiving their pension payments in the event of their death.

These include the same beneficiaries who are eligible to receive a death benefit as a new income stream (see above).

When a binding nomination may be more suitable

1. A binding nomination can be more suitable if a client wants to give their SIS dependants the flexibility to decide whether they want to receive the death benefit as a lump sum or (where eligible) an income stream.
2. 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.
3. If a client’s circumstances or preferences change prior to their death, they can amend their binding nomination at any time. Conversely, if a client wants to change a reversionary nomination, they’ll need to cancel and restart the income stream (which could have adverse social security consequences).
4. An anti detriment amount is only payable to a spouse or child if the death benefit is taken as a lump sum. For income streams that revert to beneficiaries on death, an anti-detriment payment isn’t available.
5. An income stream that commences for an eligible dependent on the death of a client is treated as a new income stream for Centrelink purposes. The relevant number for the income stream would be the life expectancy of the beneficiary when the death benefit pension commences. This life expectancy is generally lower than the life expectancy when the client first commenced the income stream. This can result in a higher deduction amount and a more favourable income test treatment for Centrelink purposes.
6. Some funds may not allow an income stream to revert to an eligible child. This is because the income stream must cease when the child reaches the age of 25, unless they are disabled at that time.

When a reversionary nomination may be more suitable

1. One of the key issues with a binding nomination is it may not always be valid (e.g. if clients forget to update their nomination when their circumstances change). A reversionary nomination will provide greater certainty that the beneficiary will receive an ongoing income stream (provided they are an eligible dependant at the time of death).
2. With a reversionary nomination, because the pension payments continue to be paid to the beneficiary, they don’t have to make a choice at a time of grief and the funds are retained in the concessionally taxed super environment. This can help ensure a beneficiary who intends to receive the death benefit, as an income stream doesn’t mistakenly take the money as a lump sum. This can be particularly important for dependants who aren’t eligible to make super contributions. Also, the Centrelink income test may adversely impact clients if the funds leave the super environment.

Bobby Woon is a technical consultant at MLC/ThreeSixty Technical Services.