People have more and more of their wealth tied up in super. People are also keeping money in super for longer during retirement – taking a super ‘pension’ rather than in ‘lump sums’.
This is because it is better from a tax perspective to leave your money in super.
But if you die with money left in super, there are a number of things you need to think about.
Most importantly, who will get your super, and what tax will be payable?
Doesn’t my Will take care of my super?
Strictly speaking you don’t ‘own’ your own super.
The super fund holds your super ‘in trust’, and it must be dealt with according to superannuation laws and the particular trust deed for your fund.
The super fund can either pay your super directly:
- To one or more super dependants; or
- To your Estate.
Who gets your super is only decided by your Will if the super trustee decides to pay it to your Estate. This may or may not happen.
Who may get my super?
Only limited categories of people can directly receive your super – they must be a ‘super dependant’. These are:
- Your spouse;
- Your children;
- People who are financially dependent on you when you die;
- People with whom you have a relationship of financial interdependence when you die; and
- The executor of your Estate.
If your super is paid to the executor of your Estate, then you can nominate in your Will whomever you wish to receive your super – the class of beneficiaries is not then limited.
Who gets to decide who gets my super?
The starting position is that the trustee of your super fund gets to decide who gets your super. The trustee must follow the rules that govern your super fund, as well as superannuation law.
Most funds provide for you to make a nomination to the trustee as to where you would like your super paid.
These nominations can either be ‘non-binding’ nominations or ‘binding’ nominations. A non-binding nomination is really just a statement of your ‘wishes’ – which the trustee may follow or choose to ignore. A valid binding nomination requires the trustee to do what you have asked – and effectively takes away the trustee’s discretion.
When I set up my super I nominated who I wanted to receive my super – but that was quite some time ago. Do I need to do anything to make sure my nomination is still valid?
There are a couple of issues here.
The nomination that you made some time ago may not have been a ‘binding’ nomination in the first place. Therefore you may wish to check and make sure that it is binding – if that is what you intend.
Furthermore, some binding nominations only last for 3 years – and then become non-binding nominations. You may need to formally ‘re-fresh’ your binding nomination every 3 years.
If you have a self-managed super fund, then you may be able to make a non-lapsing binding nomination, but you need to check your super fund deed to make sure this is possible.
You should also regularly review who you have nominated, to make sure that your nomination matches your current family circumstances.
Can someone challenge who my super fund pays my super to?
If you have a public offer fund, then certain people can apply to the Australian Financial Complaints Authority (AFCA) and have the decision as to who gets your super reviewed. Only certain categories of people can apply to AFCA, including your spouse, children, your executor and other potential beneficiaries of your super.
A challenge can be made to the AFCA irrespective of whether you have made a binding or non-binding nomination.
If you have a self-managed super fund, then a challenge cannot be lodged with the AFCA. A person may apply to the Supreme Court to have the decision of your super fund trustee reviewed under ordinary trust law principles. But this can be a complex and expensive process.
How likely would the AFCA be to overturn my nomination, or a decision by my trustee?
The AFCA must review the decision of the trustee and consider whether it was ‘fair and reasonable’ in the circumstances.
When challenging the decision of a trustee in the AFCA, similar factors come into play as those applying to challenge a will. This includes the extent to which you have adequately provided for your family and other dependants.
In what form can the money in super come out?
There are two categories of death benefits, lump sums and pensions. A lump sum is exactly that – a lump sum amount. A pension is a series of payments made over time, which can continue for a long time.
Most people are familiar with lump sums being paid when people die. However, more people are electing to adopt pensions, as this keeps the money in super, where tax benefits apply. A death benefit pension can only be paid to your spouse, children under 18, or a person with a disability.
If you are receiving a pension from your super when you die, then the terms of the pension may provide for the pension to continue to a ‘reversionary’ beneficiary.
What tax is payable when the money comes out of super?
This is a very complex topic.
What tax is payable depends on a number of factors, including:
- The status of the money in super – concessional, non-concessional, CGT cap amount, insurance proceeds;
- How the money is paid out, i.e. a lump sum or pension;
- Your age when you die – 55, 60, 65;
- The age of your beneficiary – 55, 60, 65; and
- The tax status of your beneficiary – whether they qualify as a ‘tax dependant’.
There are three potential tax rates: 0%, 15% and 30% plus the Medicare Levy if applicable. There is also a potential rebate for pension payments.
As a general rule, benefits paid to a spouse or child under 18 will be tax-free. Thereafter it gets more complicated.
What if I have life insurance in super – who receives the proceeds when I die, and what tax is payable?
If your super fund holds life insurance over you, then the proceeds get paid to the fund when you die. The proceeds then get dealt with as per the rest of your super.
What can be different is the tax treatment of the life insurance proceeds. If they are paid by your fund to a ‘tax dependant’ then no tax will apply. But if the proceeds are paid to a non-tax dependant, then tax of up to 31.5% of the proceeds may apply. Therefore you need to be careful about deciding to hold life insurance in your super fund.
Can you leave the money in super after you die, or must is come out?
Death is ordinarily a ‘compulsory cashing event’ – meaning that your super must be paid out. However, there are a couple of exceptions to this:
If you are receiving a pension from your super fund when you die, and you have nominated a valid ‘reversionary beneficiary’, then your super will remain in super, and the pension will continue for your beneficiary.
If you are not receiving a pension you can nominate that a pension is established on your death – provided that the pension beneficiary is your spouse, child under 18 or a disabled child. Under this scenario the benefits remain within super while the pension is being paid.