When you think about your superannuation, you probably focus on growing it for retirement. But have you considered what happens to it if you pass away? It’s a common myth that your super is automatically covered by your Will. In most cases, it isn’t.
Your super is held in a trust, and the fund’s trustee is responsible for paying it out. To ensure your money goes to the right people, you need to give the trustee clear instructions. This is done by nominating a beneficiary. Let’s look at the fundamentals.
Binding vs. Non-Binding Nominations
You have two main ways to tell your super fund who you’d like to receive your money. Each offers a different level of control.
A Binding Death Benefit Nomination is a direct instruction to your super fund’s trustee. It provides very high certainty, but only if the nomination is valid at the time of your death and complies with the fund’s trust deed. The trustee must pay your super benefit to the person or people you’ve nominated.
- Lapsing vs. Non-Lapsing: Many funds use “lapsing” nominations that expire every three years, requiring you to renew them. However, some now offer “non-lapsing” nominations that remain in place unless you change or revoke them.
- SMSFs: For Self-Managed Super Funds (SMSFs), the High Court’s decision in Hill v Zuda confirmed that the three-year lapsing rule does not apply. This means non-lapsing binding nominations are valid for SMSFs, provided the fund’s trust deed allows for them.
A Non-Binding Nomination is a strong “signal” or guide for the trustee, but it’s not a direction. The trustee will take your wishes into account alongside the circumstances of your dependants at the time of your death. They have the final say on the distribution. While these nominations generally don’t lapse, it’s still wise to review them regularly, as the trustee’s discretion can override your stated preference based on their assessment.
Who Can Be a Beneficiary?
Superannuation law is specific about who can receive your death benefit directly. The person you nominate must be your ‘dependant’ or your Legal Personal Representative.
A dependant under the Superannuation Industry (Supervision) Act is defined as:
- Your spouse, which includes de facto and same-sex partners.
- Your children, of any age. While children of any age can receive a benefit, the tax treatment differs significantly for adult children who are not financially dependent.
- An individual in an interdependency relationship with you. This requires a close personal relationship, living together, and one or both of you providing mutual financial, domestic, and personal support. Modified rules can apply if a disability prevents these criteria from being fully met.
- Anyone who is financially dependent on you at the time of your death. The definition is inclusive, so it can capture individuals like a parent you were supporting, subject to sufficient evidence.
If you want to leave your super to someone who isn’t a dependant (like a sibling or a friend), you must nominate your Legal Personal Representative (LPR). This is the executor of your Will. Your super is then paid to your estate and distributed according to the instructions in your Will.
What Happens Without a Valid Nomination?
If you have no nomination, or your binding nomination is invalid, the trustee must decide where your money goes. They are legally required to identify all eligible beneficiaries and make a decision that is “fair and reasonable” in the circumstances. This process can cause significant issues:
- Delays: Identifying and assessing all dependants can take months, leaving your family without access to funds.
- Disputes: The final decision can cause conflict. Beneficiaries who are unhappy with a trustee’s decision can lodge a complaint with the Australian Financial Complaints Authority (AFCA).
- Unintended Outcomes: The funds may be distributed in a way you would not have wanted.
An Extra Option for Pensions: The Reversionary Beneficiary
If you are already drawing a superannuation income stream (a pension), you may have another option. A reversionary beneficiary nomination allows your pension to automatically continue to a nominated dependant (usually a spouse) after you die, without interruption. This can be a seamless way to ensure continuity of payments.
Some Practical Tips
- For Certainty: Make a valid binding or non-lapsing binding nomination. If it’s a lapsing nomination, diarise a reminder to review and renew it at least every three years.
- For Non-Dependants: If you want to benefit someone like a parent or sibling who is not financially dependent on you, nominate your LPR and ensure your Will is up to date and reflects your wishes.
- For Pensions: Consider making a reversionary nomination for your income stream to provide continuity for a dependant, if your fund’s rules permit it.
- Regular Reviews: If you use a non-binding nomination, review it after any major life event (marriage, separation, new children), as the trustee’s decision will be based on your circumstances at death.
- Check the Rules: Always confirm your specific fund’s rules on nominations, including witnessing requirements and validity, as trust deeds differ.
Superannuation is a significant asset, and directing it correctly is a vital part of estate planning. This is general information only. As the rules are complex, we recommend you contact us for professional advice tailored to your personal financial situation and objectives.
