One of the questions that is regularly asked relates to how superannuation is dealt with on a person’s death.

Picture this…..

Dave and Marg are retirees. They both have accumulated superannuation which is being used to pay each of them a regular account-based pension.

Sadly, Dave passes away after a short illness.

At the time of his death, the balance in Dave’s pension account was $450,000. David was drawing a pension of $2,250 per month.

How Dave’s superannuation is dealt with on his passing will depend on how his pension is structured and the governing rules of his superannuation fund.

If Marg has been nominated under Dave’s pension as a “reversionary pensioner”, his pension will automatically transfer to her on his passing. She becomes the “owner” of Dave’s pension.

Should Marg wish, she could request the superannuation fund to stop paying Dave’s pension to her, however the pension account would then need to be paid out to Marg as a lump sum. In this situation, the account balance is paid directly to Marg tax free and does not form part of Dave’s estate.

Had Marg not been nominated as a reversionary pensioner under Dave’s pension account, his pension will cease to be payable on Dave’s death. The trustees of the superannuation fund will then determine how they will deal with the account balance.

If Dave, instead of nominating Marg as a reversionary pensioner, had nominated her as the beneficiary under a valid binding death benefit nomination[1], the superannuation fund is bound to pay the death benefit to Marg.

Depending on the rules of the superannuation fund, Dave’s benefit could either be paid to Marg as a tax-free lump sum benefit, or the superannuation fund could pay Dave’s benefit to Marg as a new death benefit pension. The form in which the death benefit is paid, i.e., as a lump sum or as a pension, will generally be at the discretion of the superannuation fund trustee.

On the other hand, if Dave had not nominated Marg as either a reversionary beneficiary or as a beneficiary under a valid binding death benefit nomination, Dave’s superannuation will be paid in accordance with the governing rules of his superannuation fund.

This is where things become interesting.

The governing rules of a superannuation fund will generally provide one of two options:

1. Dave’s death benefit is paid at the discretion of the trustee of the fund, or
2. The death benefit is automatically paid to Dave’s estate, to be dealt with under the terms of his will.

Where the trustee exercises discretion, they may direct the benefit be paid to one or more of Dave’s dependants[2]. The trustee may also direct the form in which the benefit is to be paid. That is, as a lump sum, or as a death benefit pension. However, if the benefit is to be paid to Dave’s adult children it can generally only be paid as a lump sum.

Where the governing rules don’t allow the trustee to exercise discretion, and a reversionary or binding death benefit nomination has not been, made many superannuation funds are now mandating that death benefits must be paid to the deceased’s legal personal representative – that is, to their estate.

Ensuring that superannuation benefits are appropriately structured to ensure they are paid in accordance with a deceased member’s wishes is a complex task.

While a reversionary nomination or valid binding death benefit nomination provide a level of certainty, understating the options available and how death benefits will be dealt with in the event of the death of a member requires time being invested to understand the rules applicable to your preferred superannuation fund.

When it comes to estate planning for superannuation benefits, one size does not fit all.

Professional financial advice can help to navigate an increasingly complex world.

[1] A binding death benefit nomination may also be referred to as a non-lapsing death benefit nomination.

[2] A dependant, for superannuation purposes, includes a spouse, children of any age, a person with whom the deceased had an interdependency relationship, or the deceased’s legal personal representative (i.e. their estate).