When a Reversionary Pension and BDBN Collide: Which One Wins?
Advisers are discovering that the “default reversion” and the “later Binding Death Benefit Nomination” don’t automatically override one another, and the wrong structure can lock in an outcome the client never intended.
Scott Hay-Bartlem, partner with Cooper Grace Ward Lawyers, said it’s important for advisers and trustees to understand how each mechanism works, how the deed sets the priority and when a flexible BDBN can outperform a hard-wired reversion.
“If I have a reversionary pension to a spouse and a binding death benefit nomination to an estate, what wins? I think you need to have some documents which actually make it clear how they might interact.”
Hay-Bartlem said at the SMSF Association Technical Summit: “So read the deed to begin with. What does the deed say? We need to see what it says about priority.”
“I had a file years ago where we acted for the wife. She was overseas. Her sister took her husband to a lawyer, changed all the estate planning arrangements away from us. There was a reversionary pension to her in place already, and he did a BDBN to the estate. The trust deed said if you make a binding death benefit nomination later, and it says that you revoke the reversionary pension, that’s effective to make the binding death benefit nomination the priority,” he said.
“What did the BDBN say? There was no clause, so had the binding death benefit nomination had one more clause, it would have won. Instead, the reversionary pension won.”
He continued that it is important for advisers to know what any deed stipulates and that it has covered all contingencies.
“If you have a reversionary pension, maybe the binding death benefit nomination never kicks in. What does the deed say? And different deeds say different things,” he said.
“You’ve also got the throw-in here of how do you stop the pension and then get a binding death benefit nomination passed? You actually have to write to the trustee and ask is it a trustee acceptance one? What does the document say?
“Being in an SMSF with the spouse might be fun and games for a long time, but at the end of the relationship, it can be very, very messy and complicated. Do you effectively need the other person’s consent to pull all this together? What do you need to do to make your later binding death benefit nomination work over an existing pension?”
Key Adviser Consideration
The interaction between a reversionary pension and a later BDBN depends heavily on the governing trust deed and the wording of the relevant documents.
Always check the deed first to determine which mechanism takes priority and whether a later BDBN can effectively override an existing reversionary pension.
He added that one of the things to think about is, in fact, whether reversionary pensions are a good idea, or should you look at doing a BDBN which does the same thing.
Reversionary Pension vs BDBN
- A reversionary pension is a paragraph in pension terms which says: “When I die, my pension continues to my spouse”.
- A BDBN says: “When I die, my superannuation must be paid to a particular person”.
- A BDBN could also say that the benefit must be paid to the person as a continuation of the existing pension.
“So, what’s the difference between a BDBN and a reversionary pension? A reversionary pension is a paragraph in pension terms which says, ‘When I die, my pension continues to my spouse’. What does a BDBN say? It says, ‘When I die, my superannuation must be paid to a particular person’,” he said.
“But it could also go on to say, ‘and it must be paid to them as a continuation of my existing pension’. A BDBN sounds like a reversionary pension. Can we revoke a BDBN? Yes. Can you revoke a reversionary pension? it might be more complicated.”
Furthermore, he noted the ATO has stated that if there is a BDBN, it is not a reversionary pension because BDBNs only state “who and not how”, which leaves trust discretion.
“If you want to have a binding death benefit nomination that looks and feels and quacks like a reversionary pension, I reckon you can actually do that as well, and I think they’re easy to change, particularly if you change your mind.”
He said BDBNs can state both who receives the benefit and how the benefit is to be dealt with, potentially allowing them to operate in a way that resembles a reversionary pension while retaining greater flexibility.
