There are a number of advantages and disadvantages of superannuation binding death benefit nominations.
A superannuation binding death benefit nomination is akin to a Will for your super.
Your Will does not control who receives your super if you die.
The distribution of your super upon death is based on death benefit nominations that you have provided to the trustee of your super.
Death benefit nominations can be binding or non-binding.
There are advantages and disadvatnages with both binding and non-binding nominations.
Non-binding nominations are generally non-lapsing, meaning they do not expire until they are replaced or revoked.
Binding nominations usually have an expiry of three years, unless they are replaced or revoked beforehand.
However, some superannuation funds now offer non-lapsing binding nominations.
Advantages of Binding Nominations
There are a number of advantages with binding death benefit nominations.
Advantage 1: Certainty
The main benefit of binding nominations is that it provides certainty.
If you have provided the trustee of your super with a binding nomination, they must pay your remaining super in accordance with that nomination when you pass away.
When a binding nomination has been submitted, a super fund trustee is unable to use any discretion as to who receives your super in the event of your death.
Your nomination is binding on the trustee and cannot be altered.
Advantage 2: Quicker Payments
Because a binding nomination provides the trustee with the highest level of certainty as to who any remaining super balance will be paid to, they can usually make the death benefit payment quicker than if they had to consider all potential beneficiaries.
The advantage of a binding nomination is that the trustee does not need to be concerned with whether or not they are making payment to the right person or people.
The trustee does not need to investigate the deceased member’s relationships at the time of death and try to figure out who should receive the death benefit.
The binding nomination must be followed with no discretion from the trustee, even if they believe it may be inaccurate.
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Disadvantages of Binding Nominations
With every pro there’s a con.
Below is a list of the disadvantages associated with binding nominations.
Disadvantage 1: Changes In Circumstances
If you make a binding nomination and then have a change in a relationship, your super could end up in the wrong hands.
Many people can separate, divorce, or have a falling out with a family member and forget to update super nominations.
Changes in personal relationships will often remind people to update their Will, but many forget about their super.
If you have made a binding nomination, the trustee of your super must pay your remaining balance to the beneficiary nominated by you on the form.
Unlike a non-binding nomination, a binding nomination does not provide the super trustee with discretion to change who the payment is made to, even if there has been a clear change in your relationships since the binding nomination form was submitted.
This is the reason why most binding nominations generally lapse after three years.
Lapsing nominations are a forced reminder to update your nomination.
Disadvantage 2: Lapsing Nominations
While lapsing nominations can be a good reminder to update your binding nomination, it can also result in no binding nomination being in place when you die, if you forget to update it after it lapses.
Failing to update a binding nomination may result in the trustee of your super using their discretion as to how any remaining super or pension balance will be distributed upon your death.
Specifically, trustee discretion could result in an unintended beneficiary receiveing your retirement savings when you die.
Disadvantage 3: Open to Challenges
Despite binding nominations forcing super trustees to pay super benefits in accordance with the nomination, they remain open to challeges.
Just like a Will can be challenged, so to can a superannuation nomination.
A disgruntled family member, friend or dependant can legally object to the beneficiary nomination that you have submitted to your super fund if they feel the distribution of your retirement savings upon your death was not done farily.
Under certain circumstances, binding death benefit nominations can be challenged.
Disadvantage 4: Reversionary Pensions
A binding death benefit nomination will not determine how a reversionary pension is paid.
If the original owner of a reversionary pension passes away, the pension and payments automatically continue to the reversionary beneficiary.
The deceased’s Will and binding or non-binding nominations have no influence as to how a reversionary pension is distributed.
One exception to this is that, if the nominated reversionary beneficiary has died prior to the original pension member, the trustee may refer to any super nominations to determine who will receive the death benefit.
A reversionary pension income stream will count towards the reversionary beneficiary’s transfer balance cap 12-months after receiving the inheritance.
Binding Death Benefit Nomination Tax Implications
There are no specific tax implications associated with binding death benefit nominations.
A binding death benefit nomination is simply a document used to direct remaining super savings upon death in a similar way that a Will works for a deceased estate.
Death benefits paid in accordance with a binding nomination are taxed in the same manner as any other death benefit.
The tax on super death benefits depend on the age of the deceased and/or beneficiary, tax components of the balance and whether the payment is made as an income stream or lump sum, or a combination.
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Binding Death Benefit Nominations: SMSFs
A member of a self managed superannuation fund (SMSF) can submit a binding nomination to the trustee of the SMSF.
The same advantages and disadvantages, noted above, apply to SMSF binding nominations.
It is not compulsory to submit a binding or non-binding nomination to a super fund trustee.
In fact, many superannuation members die with no death benefit nomination.
Where no death benefit nomination has been submitted tot he trustee, the trustee (including a SMSF trustee) retains discretion as to how the death benefit will be paid, having consideration to the deceased’s dependants and relationships just prior to death.
