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There are a few things we should all know about superannuation and how different it is to other assets when we die. And let’s face it; sadly, the only two certain things in life are death and taxes. I’ll talk about both here.
We are lucky in Australia that we don’t have “death taxes” like the UK and some other countries. However, there could be a hidden death tax that may apply to our super payouts if left to anyone other than a young child or a spouse. If you have neither, then this information may be worth reading.
Super and your estate
Superannuation is one of the only assets we can’t hold jointly with anyone else. It is also one of the few things that does not form part of our Estate (fall in line with our Will) unless we make a specific nomination for this to occur. It sits outside our Will and can be useful for blended families, where you may wish certain monies to go directly to adult children from a prior marriage, for example, and NOT be challenged. It is dealt with separately to our Will – but very important to consider in the overall scheme of our Estate Planning and total assets.
Tax implications
In retirement, superannuation can be the best vehicle for holding our savings – it is taxed at 0% up to the transfer balance cap or limit, currently $1.90M each! But if we are to die and we have no spouse or dependants, our estate beneficiaries can be hit with 17%, in “death taxes” on the taxable element – and sometimes more. You’ve probably never paid attention to your statement that will show the Tax Free and Taxable Components – possibly by % splits. The taxable component comes from contributions we have made during our lifetime, that have come from employer contributions, salary sacrifice contributions or personal deductible contributions – effectively where someone has had a tax deduction when they went in. The earnings in your super fund also add to this component too. The Tax Free component is from personal after-tax contributions we have made (private money or assets added) – often in the lead up to retirement.
With help from your adviser – and ideally after you are retired but before the age of 75, you may be able to “refresh” these components by doing a recontribution strategy (this can be complex, so make sure you get advice). Also if someone has a terminal illness and not long to live, often the adviser will suggest withdrawing all the super whilst they are still alive as the funds will likely be tax free to the individual – if they don’t have a spouse or dependant to leave it to – to avoid those possible death taxes.
Nominating beneficiaries
Another important thing we all need to do is to check our Death Benefit Nomination in our super fund – often. Don’t assume that it is in order and that it hasn’t lapsed. There are a variety of different nominations, and you may need guidance on who to include as a beneficiary. Remember too, you may have life insurance in your super fund so the death benefit amount may be more substantial than you first think.
A Non-Binding Nomination is like an expression of wishes – to the super fund trustee – who you would like them to consider paying your benefits to when you die. But ultimately the discretion for payment still lies with the Trustee to decide and to search for possible dependants or beneficiaries to consider.
No nomination or a lapsed nomination, means it is up to the Super Fund Trustees to again search for possible beneficiaries to pay your benefits to – and this can take many weeks and months – and most importantly may NOT align with your wishes.
Who can you nominate?
As outlined above, the best ones are often your spouse and/or young dependent children. Remember though, that if your kids are very young, you may prefer to nominate just your spouse rather than paying some of your super to very young children to be held in a trust for them directly. You can also nominate adult children – but as noted above they won’t get the tax-free treatment a spouse will receive. It is also possible to nominate someone in an Interdependency Relationship with you – this is complex and if you think that is the case then seek advice as this might be “legally tested or need to be proved” in the event of your passing.
If you would like your super to fall into your Estate with your other assets, then typically you would make your nominating to: Legal Personal Representative (LPR) 100%. LPR is the Superannuation legal term that means – My Estate.
If you have started a pension, then consider making it Reversionary to your Spouse. This means when you die the pension can continue to be paid to them, converting to their name and ownership at that point. They will need to get advice at the time, but what this means is the money doesn’t have to come out of the tax-free super environment.
So, my tips are:
1. Regularly check your Death Benefit Nomination and keep it updated
2. Seek advice if you are unsure when considering your total estate planning position not just your super
3. Talk to loved ones if anyone has a terminal illness and again seek advice
4. Talk to your adviser about a recontribution strategy if you are retired but not yet 75 to see if this might work for you
The Money & Life website is operated by the Financial Advice Association (FAAA). The views expressed in this article are those of the author and not those of the FAAA. The FAAA does not endorse or otherwise assume responsibility for any financial product advice which may be contained in the article. Nor does it endorse or assume responsibility for the information accessible via any links provided in the article. Please consider seeking advice from a qualified professional to ascertain how the information in this article and the links provided may relate to you.
