Maintaining control of your super
It’s a question many of us don’t think about – until we’re asked to make a nomination when opening a superannuation account or starting an Account-Based Pension (ABP).
For many Australians, super is one of their largest assets outside the family home. Deciding who will benefit from it isn’t just about ticking a box – it’s about ensuring your wishes are carried out and your loved ones are cared for. Many of us enjoy the time over the end of year break to review our financial assets and ensure they are securely organised. Now is a great time to get started, so here is the detail you need to more fully understand how to go about this.
Unlike other assets, your super doesn’t automatically form part of your estate. Instead, it’s distributed by the super fund trustee based upon your nomination, or at their discretion if no valid nomination exists. That’s why it’s critical to understand the options, whether to make a:
- Binding, or non-binding,
- Lapsing or non-lapsing nomination;
And to consider who qualifies as a valid beneficiary.
But there’s more to it. Tax implications, the relationship between you and the beneficiary, and even estate planning considerations – like avoiding disputes or protecting your assets from creditors – can all come into play. In NSW, for example, notional estate laws can create an unexpected twist.
Why would David nominate his estate, rather than directly nominating his children?
David, 55, nominates his two adult children, Emma and Jack, as equal beneficiaries of his $500,000 superannuation balance. Because they are not financially dependent on David, they are classified as non-tax dependants. If the superannuation is paid directly to Emma and Jack, each would receive $250,000, but the taxable component would attract 15% tax plus the medicare levy.
Alternatively, David could nominate his estate, allowing the funds to flow into a testamentary trust that is set up in his will. There are more costs added by this approach, however it is an option worthy of consideration because it provides:
- Flexibility: The trustee can distribute income and capital in a way that considers both Emma’s and Jack’s individual tax positions.
- Tax efficiency: By splitting income or taking advantage of each beneficiary’s marginal tax rates in different tax years, the tax burden can be reduced.
- Asset Protection: The trust can provide some protection from creditors or potential family law disputes.
For example, if Emma’s husband runs a construction business with significant financial risk, her inheritance in the trust is protected from any business liabilities. Similarly, for Jack, the trust ensures that his inheritance is quarantined from a potential family law claim, providing peace of mind that his share won’t be affected in the event of a divorce or separation.
Making a valid binding death benefit nomination gives you greater control over who receives your super and how.
In the following Q&A, we’ll break down how these nominations work, their impact on super, tax, and estate laws, and what you need to consider to make the right decision.
How do I make sure my super goes where I want?
To ensure your superannuation benefits are distributed according to your wishes, you can nominate a valid beneficiary such as your spouse, child, financial dependant, or your estate. You can name more than one beneficiary, but make sure the sum of the percentage you designate adds to 100%.
Nominations can be binding or non-binding, and they can be lapsing or non-lapsing. It will depend upon the trust deed of your superannuation fund.
Q: What is a binding death benefit nomination (BDBN)?
A. A BDBN is a legally binding instruction to your super fund, directing the trustees of the fund how your super should be distributed upon your death.
Q: What makes a nomination valid?
A. The nomination must:
- be in writing using the fund’s own form.
- be signed and witnessed by two independent adults.
- only nominate valid beneficiaries under the SIS Act or your estate.
- be reviewed every three years if it’s a lapsing nomination (unless a non-lapsing is available).
Q: What happens if my nomination is invalid or lapses?
A. The trustee will decide how to distribute your super, which may not align with your wishes.
Q: Who can I nominate as a beneficiary?
A. Under the Superannuation Industry (Supervision) (SIS) Act, valid beneficiaries include;
- Spouse (married or de facto, including same sex partners)
- Children (biological, adopted, stepchildren)
- Someone financially dependent on you
- Someone in an interdependent relationship with you (close friend, living together and sharing financial, domestic support and personal care)
- Your legal personal representative (LPR, i.e. the executor of your will).
Example: James, 28, nominates his older siblings as beneficiaries. Because they are not financial dependants, the nomination is invalid. James could instead nominate his LPR, and ensure he has a will in place that specifies his siblings as beneficiaries.
Q. What are the different tax outcomes for tax dependants vs non tax dependants?
A. A tax dependant under tax law includes a spouse, children under 18, someone financially dependent on the deceased, or someone in an interdependent relationship with them.
- For tax-dependants, both lump sums and pension superannuation death benefits are tax free, regardless of the deceased’s age.
- For non-tax dependants, lump sum superannuation death benefits are taxed at 15% plus the Medicare levy on the taxable component, while the tax – free component remains untaxed.
- Non-tax dependants cannot receive superannuation death benefits as a pension.
What about reversionary pensions?
Nominating an automatic reversionary beneficiary is effectively a binding nomination for a pension or an annuity that has already commenced.
Q: What is a reversionary pension?
A. A reversionary pension allows your super to continue as an income stream to a nominated beneficiary (typically your spouse). This option can provide tax advantages, and a smoother transfer of benefits.
Q: How does it differ from a lump sum payment?
A. Lump sums are a one-time payment and may have different tax implications. Reversionary pension keeps funds invested in super and provide ongoing income, which could be tax-free depending on the recipient’s age and their relationship to the deceased.
Q: What about nominating a child?
A. If allowed by the fund’s trust deed, you can nominate a dependent child to receive a reversionary pension. For children with a permanent disability, the pension can continue as ongoing income without a specific age limit, providing long-term financial security in a tax-advantaged environment.
For other dependent children the pension can only be paid until they reach 18 unless the child is financially dependent – then the pension may continue until they turn 25. After that, the remaining balance of the super must be paid out as a tax-free lump sum.
What is the notional estate in NSW?
The notional estate provisions are unique to NSW and apply to assets that are NSW-based, and means that super can form part of a deceased notional estate where contested.
Q: Will my nomination be followed in NSW and bypass my estate?
A. Generally, yes, if you nominate and maintain a valid nomination. However, in NSW, the court can treat super as part of the ‘notional estate’ if the will is contested, and it is deemed necessary to provide for dependents or eligible claimants.
Other considerations
Life insurance in super
When life insurance is held within a superannuation fund, the proceeds are paid into the fund and distributed as a superannuation death benefit. This means the same rules for taxation and dependents apply. Beneficiaries who are not dependants under superannuation law (such as adult children) may face significant tax implications on the taxable component of the death benefit.
Transfer balance caps
The Transfer Balance Cap (TBC) limits the amount that can be transferred into the retirement phase of superannuation, where earnings are tax-free. When making a BDBN, it’s important to consider the beneficiary’s transfer balance cap. If a death benefit pension is paid and causes the cap to be exceeded, the excess must be removed from the retirement phase and may be subject to tax.
Self-managed superannuation funds (SMSFs)
BDBNs in a SMSF context require careful drafting and compliance with both the fund’s trust deed and superannuation laws. Trustees need to ensure the BDBN is valid and binding, as a misstep could result in the distribution of benefit not aligning with the members wishes.
- As some SMSF trust deeds allow binding non-lapsing nominations, extra consideration should be given to what might happen if the member or director of the corporate trustee loses capacity, and who is the enduring Power of Attorney.
- Additionally, SMSF trustees should consider whether the fund has sufficient liquidity to pay out the death benefit, particularly if the fund holds illiquid assets like property.
- SMSFs registered in NSW or holding assets in NSW will be subject to notional estate laws.
Key takeaways and practical steps
- Make a valid nomination: Ensure nominees meet the legal definition of dependants or nominate the estate (LPR) and have an updated will.
- Renew regularly: For lapsing nominations, review every three years or consider non-lapsing options if available.
- Plan for dependants: Use reversionary pension for continuing income streams and understand how state laws like the NSW notional estate might impact distributions.
- Seek expert guidance: Engage a financial planner or estate lawyer to structure nominations and wills effectively, to minimise disputes and ensure your intentions are met.
Superannuation can be one of your most significant assets, but making the right decisions about how it’s distributed requires careful planning. Whether it’s understanding the tax implications, choosing the right type of nomination, or exploring options like testamentary trusts, it pays to have expert guidance.
Retirement Essentials strategy consultations are here to help you navigate the complexities and work out how to make a nomination that directs your super exactly where you want it to go. Book a meeting today to take the next step in securing your financial legacy with full confidence.
This article is provided by Retirement Essentials Representative Number: 001260855. We are an authorised representative of SuperEd Pty Ltd ABN 88 118 480 907 AFSL #468859. This information is not intended as financial product advice, legal advice or taxation advice. It does not take into account your personal situation, goals or needs and you should assess your own financial situation, consider if the information is suitable for you and ensure you read the relevant Product Disclosure Statement (PDS) if you choose to make any changes to your financial situation. It is always advisable to consult a financial adviser before making financial decisions.
What is a BDBN? Sick of all this complexity for retirees who have worked all their lives and simply want to leave our assets to our 2 children. Ware are self funded retirees.
It’s defined in the article:
Q: What is a binding death benefit nomination (BDBN)?
Hi Sheila, Yes – A Binding Death Benefit Nomination (BDBN) can feel like just one more layer of complexity, but it does give you control over how your super is distributed after you’re gone.
It’s essentially a legally binding way to ensure your super goes to who you want rather than leaving it up to the trustee of your super fund to decide.
I’m confused about nomination of independent children in a BDBN. The article seems to indicate that this is not enforcible.
Can someone advise me?
I had the same question as Peter Clark after reading the article.
Hi Peter, your children (biological, adopted, or stepchildren) can be nominated in your superannuation, and are valid beneficiaries for a superannuation binding death benefit nomination.
The tax treatment for them on receiving the benefit will vary depending of whether they are tax dependants or not.
Non-tax dependants cannot receive superannuation death benefits as a pension.
Have i missed where in this article is the information about a non binding nomination.
Hi Laurence, for a non-binding nomination your choices are not legally binding on the trustee and only act as a guide for the trustee in deciding how to pay your Superannuation Death Benefit.
Making sure a non-binding nomination is valid is just as important as with binding nominations. The nomination must only nominate valid beneficiaries under the SIS Act or your estate.
Hi
Are there legal ways of minimising tax paid by children receiving Super ie taking monies out of super and then reinvesting back in as an after tax contribution ?
Hi Eileen,
A recontribution strategy aims to increase the tax-free component of a superannuation income stream or death benefit.
To achieve this, the strategy involves making tax-effective withdrawal of taxable components from superannuation and re-contributing them back to superannuation as non-concessional (or other eligible contributions such as downsizer), which then form part of the tax-free component.
I would recommend that you book a Strategy Consultation to consider if the strategy is right for you – there are several elements to consider before taking a re-contribution strategy, including your taxable component proportion, your eligibility to withdraw from super, and eligibility to contribute back.