Binding Death Benefit Nominations & Reversionary Pensions – Do they go together like a horse and a carriage?

Well probably “yes” to answer to the song’s rhetorical question.

But we need to start at the beginning.

Binding death benefit nomination

A binding death benefit nomination (BDBN) is, essentially, a mandatory instruction from a member to the trustee that the member’s interest in the fund in the event of the member’s death is to be paid to one or more individuals. There are limits to the instruction – principally the individuals must be either:

• the spouse or child of the member;
• a financial dependant of the member;
• an individual who was in an interdependency relationship with the member; or
• the estate of the deceased member.

So it is possible for a member to have a BDBN which provides that the death benefit will be paid to the spouse of the member and that benefit could be paid as an income stream for the spouse.

Reversionary pension

A reversionary pension is an income stream payable to a member (‘the primary beneficiary” of the income stream) which on the death of the primary beneficiary automatically transfers to the nominated reversionary beneficiary.

Assuming the reversionary pension and the BDBN are inconsistent which takes precedence? This is a difficult legal question. Years of legal practice suggest that difficult legal questions should be avoided. The best advice is to let others spend their money on lawyers debating the issue. However, my spare threepence would be backing the reversionary pensions over an inconsistent BDBN.

The drafting of the SUPERCentral Governing Rules has avoided this issue by expressly providing that the reversionary pension takes effect over an inconsistent BDBN. Does this mean that BDBNs are not required for SMSFs on the SUPERCentral system? Absolutely not.

Reversionary pensions and BDBNs can work together as shown in the following situations

1. The reversionary beneficiary may predecease the primary beneficiary – in which case the BDBN will apply to the pension.

2. The reversionary beneficiary while surviving the beneficiary may be ineligible to receive the pension (ceased to be the spouse and is not a financial dependant) – in this case the BDBN will apply to the pension.

3. The reversionary beneficiary while surviving the primary beneficiary, may have artificially accelerated the primary beneficiary’s demise. In this case the reversionary beneficiary will not be permitted to accept the transfer of the pension and the BDBN will then operate.

4. The primary beneficiary may have other superannuation interests/accounts in the fund. For example the primary beneficiary may have an accumulation interest as well as the pension interest. The primary beneficiary may have another pension interest which is not reversionary. In this case the BDBN will operate on other superannuation interests.