I spend my days working closely with financial advisers as they help their clients get their affairs into some sort of order.
While the financial adviser’s role generally involves advice focussed on the accumulation and investment of a person’s wealth, an important part of their role addresses the timely distribution of that accumulated wealth. This is sometimes described as the ‘de-accumulation phase”.
Where wealth has been built up in the superannuation system over a lifetime of working, de-accumulation occurs when clients decide to retire and need to turn their accumulated super into a regular source of income. De-accumulation also occurs on death when assets are distributed to beneficiaries.
One of the questions that often arises is “what happens to my super when I die?”
The answer to this question is very much a case of “it depends”!
And I am not being frivolous with my answer. Each person’s individual circumstances will dictate what happens to their super.
The distribution of superannuation money on death will depend on factors including:
- If, in the pension phase, was a reversionary beneficiary nominated?
- In the absence of a nominated reversionary beneficiary, is there a surviving spouse or other dependants that can receive the benefit?
- Alternatively, is the preference for the superannuation benefit to pass to the individual’s estate and be dealt with under their will?
When it comes to dealing with superannuation death benefits, the law governing tax and superannuation is complex. And getting it wrong could result in potential beneficiaries missing out on their inheritance.
Superannuation death benefits do not automatically form part of a person’s estate.
A superannuation fund is required by law to pay a death benefit to the deceased member’s dependants. This may include a spouse, children (including adult children), or a person with whom the deceased had an “interdependency relationship”.
Alternatively, a superannuation fund trustee can pay a member’s death benefit to the deceased’s “legal personal representative”, in which case it does pass to their estate.
Superannuation laws do not generally allow for a superannuation fund to pay a benefit directly to friends, parents, brother and sisters, or other relatives of an individual, unless that person was financially dependent on the deceased.
In the absence of the fund member having nominated the person they would like their superannuation to be paid to, the trustees of the superannuation fund will pay the benefit in accordance with the governing rules of their fund. This may include allowing the trustees to exercise their discretion to decide who the death benefit will be paid to, or the fund’s governing rules might require a death benefit to be paid in a particular manner, such as to the member’s estate.
The control lies with the trustees of the fund, which may be inconsistent with the wishes of the deceased.
How can some certainty be given to the distribution of superannuation benefits on death?
Most superannuation funds will allow their members to nominate who they would like their superannuation to pass to in the event of their death.
There are a variety of different forms of nomination including a non-binding, binding, and non-lapsing death benefit nominations. For a person receiving their superannuation benefits by way of a superannuation pension, generally an account-based pension, they can also nominate a reversionary beneficiary.
Where a valid reversionary pensioner is nominated, the deceased’s superannuation will automatically continue to be paid to that person. Generally, a reversionary pension can be paid to a surviving spouse, children under the age of 18 (or 25 if they are financially dependent on the deceased), and other financial dependants.
Like a reversionary pension nomination, a binding or non-lapsing death benefit nomination is a direction to the trustees to whom the superannuation benefit should be paid. Provided the nomination is valid at the time of death, the fund is bound to comply with the nomination.
Generally, the only people that can be nominated under a death benefit nomination include a spouse, children of the deceased, those within the deceased had an interdependency relationship. The legal personal representative can also be nominated under a death benefit nomination, in which case the death benefit will form part of the estate.
In order to get one’s super in order, it is recommended that superannuation is reviewed from time to time to ensure that in the event of a person’s death, their superannuation will be paid to the right people. A financial planner is well equipped to carry out such a review.
In a later blog, we will look at how superannuation death benefits are taxed.
PK believes people have the right to accurate, affordable and unbiased information that addresses all aspects of their preferred retirement lifestyle, thereby giving them the opportunity to make informed decisions that will empower them to live out their lives with dignity, certainty and security.
Tealey’s ambition is to change how people think about their retirement, he wants people to dream, plan and realise retirement is not defined by a magical age prescribed by the legislation.
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