Superannuation is a key aspect of financial planning in Australia. Funded by employers and mandated by the government, this retirement savings program holds a percentage of your earnings in a designated fund. When reviewing your long-term financial position, it’s important to nominate a beneficiary for your fund in the case of your death. When you list a beneficiary, any money left behind will be distributed in the way you intended.
What is a nomination of beneficiary?
A beneficiary is any person who receives funds from your superannuation after you die. You can nominate one or more beneficiaries by providing formal instruction to the trustee of your superannuation fund.
There are two types of nominations in Australia: a binding death benefit nomination (BDBN), and a non-binding death benefit nomination. Regardless of your age or financial position, choosing a beneficiary is an important part of estate management.
Who can you nominate?
When you’re nominating beneficiaries, it’s important to follow the correct procedure. Not all people are eligible, so it’s important to work with a financial planner to get the details right. Beneficiaries typically include family members and other people who may be financially dependent on you after you die. However, there are other options:
- Your spouse or partner
- Your children (including stepchildren and adopted children)
- Anyone who is financially dependent on you when you die
- An interdependent
- Your estate or legal personal representative
If you choose to nominate your estate or legal personal representative, this person is known as an executor, and nominating this person allows you to specify distribution directly in your will. To ensure the validity of your will, it’s important to keep it up to date. When everything is correct, your legal personal representative can distribute your super money quickly based on your instructions.
Why beneficiaries are important
Nominating a beneficiary specifies who will receive the benefits of your superannuation fund in the event of your death. This is an important aspect of estate planning, as it ensures the distribution of your money according to your wishes. When you nominate beneficiaries, you can help to provide financial security for your loved ones after your passing. The death of a loved one is a difficult time, so this process makes it easier for everyone involved.
Types of nominations
In Australia, there are two ways of nominating beneficiaries in superannuation:
- Binding Death Benefit Nomination: This is a formal instruction to the trustee of your superannuation fund regarding who should receive your superannuation benefits. A BDBN is legally binding, provided it meets certain financial and legal criteria. Typically, you’ll need to specify the percentage of your benefit that each nominated beneficiary should receive.
- Non-Binding Death Benefit Nomination: Some superannuation funds also offer non-binding nominations. This type of nomination is less formal, serving as guidance to the trustee rather than legal instruction. While non-binding, trustees usually consider these nominations when making decisions about the distribution of benefits.
Key things to consider
When nominating a beneficiary for your super fund, there is a lot of information to consider. From validity periods to contested nominations, from tax considerations to insurance, the following points need to be understood with help from a financial planner:
- Estate management: Your super is not automatically part of your estate, which is why you need to nominate a beneficiary. If you don’t make a nomination, your super fund will follow relevant laws to decide who receives your balance.
- Insurance: When you’re nominating beneficiaries in superannuation, they will receive the amount of money in your super account plus any insurance benefit that is payable. This is called a superannuation death benefit.
- Validity period: BDBN nominations usually have a limited validity period, often around three years. After this period, they need to be renewed. For this reason, it’s essential to keep your nominations up to date (e.g., marriage, divorce, birth of children).
- Contesting nominations: In some cases, nominations can be contested, especially if they’re perceived as unfair or not compliant with relevant laws. It’s essential to ensure your nominations are clear, valid, and legally enforceable to avoid this process.
- Tax considerations: Superannuation death benefits are usually tax-free when paid to a spouse or dependent children. However, they may be subject to tax if paid to non-dependents, such as adult children or other individuals.
Making a reversionary beneficiary nomination when a pension commences.
Why choose a reversionary beneficiary
The fund’s trustee will always have ultimate discretion as to who will receive your super death benefits under the nominated beneficiary option. A binding nomination option may not always be valid if your circumstances change, and you forget to revise your nomination or your nomination lapses. Provided your intended beneficiary is a dependent, a reversionary beneficiary option provides greater certainty they will receive your pension payments following your death.
Advantages of receiving a reversionary pension
Generally, the pension is tax-free, or at least concessionally taxed, depending on the age of the deceased person and their beneficiaries at date of death.
Earnings and capital gains on pension assets are tax-free (in the fund). Your personal transfer balance cap (up to $1.9m) limits how much super you can move to pensions that benefit from tax free earnings.
By receiving a death benefit as a lump sum some beneficiaries may not be able to contribute that money back into a superannuation fund due to certain restrictions imposed by law, whereas a death benefit paid as a pension would retain funds in the super environment.
The estate is given additional time of 12 months to maximise funds in superannuation for the beneficiary. There is no urgency to deal with death benefits at a time of grief as the pension simply switches from the deceased to the reversionary beneficiary.
Disadvantages of receiving a reversionary pension
Funds are not readily available to pay off non-deductible debts; however the pension may be withdrawn as lump sum cash if necessary.
The value of a reversionary pension will count towards a spouse’s transfer balance cap that determines how much money a person can have in tax-free pensions.
Overall, nominating beneficiaries for superannuation in Australia is an important aspect of estate planning. Whether you nominate a family member or someone else in your life, this process ensures that your superannuation benefits are distributed according to your wishes. If you want to nominate a beneficiary and provide financial security for your loved ones after your passing, it’s important to work with a trusted financial planner. To learn more about nominating beneficiaries in superannuation, please contact our team.
This article contains general information about superannuation beneficiary nominations. It does not consider your individual personal circumstances and therefore should not be relied upon when making decisions about your superannuation beneficiary nominations or reversionary pension nominations. Before relying on any content, you should ensure that you have obtained individual personal advice from a licenced Financial Adviser.
