Who should inherit your super?

For many Australians, superannuation is their second-largest asset after the family home. While you might spend decades finetuning how it is invested, many do not spend time deciding who should receive it when they’re gone.

Unlike most of your assets, your super doesn’t automatically form part of your estate. In many cases the trustee of your super fund decides who receives your balance, unless you’ve provided valid instructions.

Choosing the right type of beneficiary nomination can have significant consequences for your family. It can affect how quickly money is paid, whether your wishes are followed, how much flexibility your beneficiaries have and, in some circumstances, the tax they ultimately pay.

There isn’t a universally ‘best’ option. The right choice depends on your family situation, your estate planning goals and whether you value certainty or flexibility.

Why your will isn’t enough

One common misconception is your will determines who inherits your super.

In reality, your will generally only controls assets that form part of your estate. Superannuation sits in a separate legal structure. Unless your super is directed into your estate, your executor may have little control over where your super ultimately ends up.

That means it’s important to think about your super beneficiary nominations as part of your overall estate plan, rather than an administrative afterthought. Below are the different types of nominations that you can make – and their implications.

Non-binding nominations: Maximum flexibility

A non-binding nomination is the default option offered by many super funds.

You can tell the trustee who you would like to receive your super, but the trustee isn’t legally required to follow your wishes. Instead, they consider your nomination alongside your circumstances at the time of death before deciding who should receive your benefit.

This can work well if your family circumstances are likely to change, or you have a blended family. It may be that you have young children or an expectation that your financial dependants may change. If you have faith the trustee will exercise discretion appropriately and you want flexibility in case your relationships evolve over time, a non-binding nomination may be the right path.

The downside is uncertainty. The final outcome may differ from what you originally intended, particularly if family members disagree about your wishes.

Binding nominations: Greater certainty

A binding death benefit nomination requires the trustee to distribute your super according to your instructions, provided the nomination is valid and your nominated beneficiaries are eligible under superannuation law.

This provides much greater certainty and reduces the trustee’s discretion. It may suit you if you have a straightforward family structure, know exactly who should receive your superannuation and want to minimise the risk of disputes.

For many couples with children, this provides peace of mind that their wishes will be followed. However, certainty comes with a trade-off. If your circumstances change and you forget to update the nomination, your instructions may no longer reflect your intentions.

Lapsing binding nominations: Certainty with regular reviews

Many binding nominations automatically expire after three years unless they are renewed. This is known as a lapsing binding nomination. While some people see the expiry date as an inconvenience, it serves an important purpose by encouraging regular reviews.

Life happens. Marriages end, grandchildren are born, financial dependence changes and family relationships evolve over time.

Lapsing nominations can suit investors who are happy reviewing their estate planning every few years, want certainty but also appreciate periodic chances to update their wishes, and have changing family circumstances.

The obvious risk is forgetting to renew it. If the nomination expires, many funds revert to treating it as a non-binding nomination.

Non-lapsing binding nominations: Long-term certainty

Some super funds now allow non-lapsing binding nominations, which remain in force until you actively change or revoke them. Rather than expiring every three years, they continue indefinitely.

A non-lapsing binding nomination may be appropriate if your estate planning is well established, your family situation is stable and you don’t want the administrative burden of regular renewals.

These nominations remain effective indefinitely so it’s important to review them after major life events, including marriage, divorce, births or deaths.

Reversionary pensions: Keeping retirement income flowing

If you’re already drawing an account-based pension, a reversionary nomination works differently. Instead of paying out a lump sum, the pension automatically continues to your nominated beneficiary after your death, provided they are eligible. This can avoid delays and provide ongoing income for a surviving spouse.

Reversionary pensions are commonly used by retired couples, especially if it is critical \ retirement income continues uninterrupted. It reduced administrative simplicity after death. There may also be strategic tax and transfer balance cap implications, making this an area where financial or accounting advice is particularly valuable.

Legal Personal Representative: Directing super through your estate

Instead of nominating an individual beneficiary, you can nominate your Legal Personal Representative (LPR). Your Legal Personal Representative is the executor named in your will (or the administrator appointed if you don’t have a valid will). When your super is paid to your estate, it is distributed according to the terms of your will.

This approach can be appropriate when your will contains detailed instructions that can’t easily be reflected through a super nomination. It is also the selection made when a testamentary trust is established.

For blended families, young children or situations involving trusts, directing super through the estate may provide greater flexibility. However, there can also be disadvantages. Payments may take longer, become subject to estate administration and, in some cases, expose assets to challenges against the estate.

I’ve spoken to an estate planning expert on how to minimise the tax you pay through your will, and how to create an airtight will.

What I’ve chosen

I’ve chosen a binding non-lapsing nomination for my superannuation. I include the nomination review in my annual portfolio review and know that there is no risk with it being bound to the wrong person. My personal circumstances are simple – I have a husband and no children or other financial dependants. This simplicity and certainty allow me to keep a nomination that usually needs regular reviews.

Final thoughts

Choosing the right beneficiary is important, but it’s only one part of effective estate planning.

Eligibility rules determine who can receive your super directly and tax outcomes can vary depending on whether beneficiaries are considered dependants for tax purposes. I’ve written about the differences here.

Most importantly, beneficiary nominations shouldn’t be a ‘set and forget’ decision. Review them whenever you experience a significant life event such as getting married, separating, having children, retiring or updating your will. If you hold your superannuation through an industry or retail superannuation fund, this will be listed on your annual statement. Ensure that it forms part of your annual review and update where necessary.