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Avoiding conflicts with BDBNs and reversionary pensions

By Michael Harkin
02 August 2019 — 5 minute read

The SMSF environment is generating more and more case law. Without proper care, conflict between a pension reversion nomination and a binding death benefit nomination may be next.

This article considers which nomination should apply first, when an SMSF member leaves both a reversionary pension nomination and a binding death benefit nomination.

What is the answer?


Let’s start with a question – why prepare a reversionary pension nomination if the binding death benefit nomination overrides it?

The established industry view is certainly that a valid reversionary pension nomination will apply before a binding death benefit nomination.

Part of the reasoning for this is enunciated by Heather Gray, partner at Hall & Wilcox one of Australia's leading superannuation lawyers.

"A reversionary nomination creates a contractual right in the reversionary beneficiary to have the pension paid to them on the death of the original pensioner. This means that the pension assets do not form part of a death benefit that is available for distribution," she said.

This contractual obligation can certainly create a risk of conflict where other instruments, such as a BDBN, are in place, particularly where they provide benefits to different beneficiaries. 

As such it is important to determine exactly what does take precedence when it comes to the documentation that your clients have in place to ensure that upon the death of the member no litigation ensues.

There is no case law yet relating to this issue but some differing views have occasionally been expressed across the industry. What is for certain is that the trust deed for the fund plays a very important part in answering our question and that is where we will begin our examination.

What does the trust deed say?

The first consideration as to what takes precedence must be to check the trust deed, as an SMSF is governed by the rules contained in that deed.

Clear guidelines

A good trust deed will provide clear guidance to the trustee as to which of a reversionary pension nomination and a binding death benefit nomination will prevail, in the event that a member provides both forms of instruction to the trustee. What should your deed state? A well-drafted trust deed will provide that a reversionary pension nomination will take precedence over a valid BDBN, otherwise there could easily be conflict with contractual obligations as noted earlier. 

Why is this guidance necessary?

The superannuation reform changes from 1 July 2017, and the impact of the transfer balance cap, has possibly resulted in a portion of a member's balance in:

  • income streams; and
  • accumulation.

Because there now exists a limit on the amount a beneficiary may receive as a death benefit income stream, some death benefits may need to be paid as a lump sum.

That may result in the need to provide documentation to cover both the reversion of the income stream (reversionary pension nomination) and distribution of the remaining benefits (binding death benefit nomination).

This being the case, it is extremely important that clear guidance is provided in the trust deed as to which type of nomination takes precedence over the other.

Can one document cover all?

Basically, no, as each document has a specific purpose.

Reversionary pension nominations

Only relevant for the income stream it relates to.

Binding death benefit nomination

A binding death benefit nomination can cover both the member’s benefits in accumulation and, potentially, income streams.

It is this apparent overlap which raises questions regarding potential conflicts between the instructions contained in a reversionary pension nomination and those in a binding death benefit nomination.

Overcoming the 'conflict'

As mentioned earlier, the old adage, “check the trust deed”, should be the first step in determining whether any possible conflict does exist.

If the trust deed is silent on which document will take precedence, or if the SMSF deed promotes a BDBN taking priority, there is certainly a potential conflict, and this being the case, the existing pension documentation and BDBNs should be examined and the trust deed replaced to provide clear guidance.  It is worthy of note that in updating the trust deed, the deed of variation should have the ability to retain existing BDBNs to ensure they remain valid after the update.

Example 1

Consider the position of the surviving (second) spouse of a deceased member, who is also the sole remaining director of the corporate trustee of the SMSF.

The deceased had children from a prior relationship and wanted both the spouse and children to receive a portion of his death benefits.

As part of his estate planning, he has arranged preparation of:

  • a reversionary pension nomination directing the income stream will automatically revert to his spouse; and
  • a binding death benefit nomination directing the remaining benefits to be paid to his adult children.

Those adult children, aware of the existence of a reversionary pension nomination and a binding death benefit nomination, claim the entire death benefit, including the income stream.

The basis for their claim – they are of the opinion the binding death benefit nomination takes precedence over a reversionary pension nomination.

The director looks to the trust deed for guidance and notes the trust deed enables both forms of instruction, but provides no guidance as to how they are to operate.

The result depending on the preparedness of each party to negotiate a settlement, a determination by a court may be the only outcome.

Consider now the position of the adviser who prepared those documents, based on a poorly drafted trust deed, as they find they are dealing with a claim from a disgruntled “beneficiary”.

Properly drafted trust deed

The claim in the example from the adult children could have been easily overcome if the trust deed of the SMSF had clear instructions as to which document takes precedence.

If the trust deed directed that a valid reversionary pension nomination will apply before a binding death benefit nomination takes effect, the trustee could have easily stopped any claim from the adult children.

Example 2

Consider the scenario of a member who has adult children from a previous relationship and a minor child from her current relationship. Her current spouse is sufficiently well-off and she wants to provide for the minor child by way of an automatically reversionary pension.

She also prepares a BDBN in which she directs the remaining benefits be distributed to her adult children.

Her SMSF trust deed directs that a valid pension reversion nomination will take precedence over a BDBN.

She understands that she will need to review those provisions regularly, and particularly as the child nears 18 years of age.

Sometime later she asks her lawyer to review her estate planning and, as part of that review, the lawyer arranges an update of the SMSF trust deed.

However, that set of governing rules direct that the BDBN overrides the pension documentation.

Unfortunately, the member dies and the problem is discovered too late – the underage child receives nothing because of the directions in the governing rules.

So, pension reversion first and binding death benefit nomination next?

That is the Topdocs’ view as to the correct order, but also that it must be covered in the trust deed of the SMSF.


Having the correct documentation, not only in the form of binding death benefit nominations and reversionary pension nominations, but also clear directions in the trust deed as to order of precedence, is vital in ensuring the death benefit wishes of the member are able to be actioned, and the expensive process of litigation avoided.

If the current trust deed does not provide guidance, or if the guidance contradicts the intentions of the member, have the trust deed varied. And in doing so, ensure the deed you choose has the correct sequence of death benefit payments clearly noted.

Michael Harkin, national manager, training and advice, Topdocs

Avoiding conflicts with BDBNs and reversionary pensions
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