Q. I am 61 and married. I have a Superannuation fund and a Transition to Retirement Allocated Pension that I started in 2014. The Superannuation fund has a Binding Death Benefit nomination to my Wife. However in the Allocated Pension, my wife is a Reversionary Beneficiary. What is the difference and why are they not the same instructions?
A. A Binding Death Benefit nomination is an instruction to the Trustee of the Superannuation fund by the member on who is to receive their Superannuation benefits when the member dies.
The nomination must be to someone who is defined as a Dependant under the Superannuation (Industry Supervision) (SIS) act, or your estate. A dependant for super purposes can be a spouse, a child, someone who is financially dependent on you or with whom you have an interdependency relationship.
As your nomination is binding and provided that it is valid, the Trustee must comply with your instructions on death. Binding Nominations usually need to be renewed every 3 years unless they are a Non-lapsing Binding Death nomination which as the name infers does not expire. The alternative is a non-binding nomination where the Trustee has the discretion to vary how to pay the funds to your beneficiaries.
To receive the benefits tax free the dependent must also be a tax dependent. A spouse would receive the benefits tax free. So in your case, on your death, the Trustee is compelled to pay your Superannuation benefit to you wife and the proceeds would be tax free.
You have elected to have your wife as a Reversionary Pensioner for your Allocated Pension (Account Based Pension). In the event of your death, the Account Based Pension would continue to be paid as though the Reversionary Pensioner was the original Pensioner.
The primary advantage of this election is that the Account Based Pension would seamlessly transfer to your wife on your death. Thus any rights or benefits applicable to your existing Account Based Pension would continue after your death. Your wife is not compelled to continue the Account Based Pension but she has the option as opposed to taking a lump sum.
Reversionary Pension nominations can be restrictive as you can only nominate one recipient. Also, only certain dependants are eligible to be nominated (eg all SIS dependants with special rules applying for children). Other limitations may apply if you wish to change your election. You would commonly be required to commute (cash out) the Account Based Pension and recommence a new Account Based Pension with the new election. This may be necessary if your Spouse was to die, you were to divorce or you wished to change your distribution to beneficiaries.
By commuting an Account Based Pension, any rights or benefits applicable to your existing Account Based Pension that are “grandfathered” or protected from legislative change would be subject to the rules applying to a new Account Based Pension. An example of this would be the changes that occurred to new Account Based Pensions established from 1 January 2015 in relation to their Income test assessment for Centrelink Pension purposes. Eligible pre 1 January 2015 Account Based Pensions with Reversionary Beneficiaries will continue to receive the more favorable Income test assessment on the death of the member. Pre 1 January Pensions that are commuted or paid out as a lump sum do not.
As with a Superannuation fund, you can elect to have a Binding on Non-Binding Beneficiary nomination for an Account Based Pension. You have the flexibility to elect multiple dependents or your Estate and make changes as your circumstances change. However a death benefit payable to the beneficiaries will be subject to the prevailing law possibly without the benefit of “grandfathering”.