What happens to your super when you die?

Life planning

Superannuation is a significant asset to most, especially those reaching retirement who’ve contributed (or their employer has contributed) into super throughout their working life.

There are significant tax benefits which make superannuation attractive. However, have you considered what happens to your superannuation when you die?

“In this world nothing can be said to be certain, except death and taxes" — Benjamin Franklin

Superannuation law says that death benefits must be dealt with as soon as practicable after death. There are different ways your superannuation benefits can be paid on your death. Generally, they’re paid as a lump sum often called a “death benefit lump sum” or “lump sum death benefit”, paid by taking the monies as a pension (a death benefit pension), or a combination of both. Importantly, your superannuation cannot be left to keep accumulating after your death.

Who can your superannuation be paid to?

Your superannuation can generally only be paid as a lump sum to your estate, or to one or more of your “dependents”.

Dependents can be: your spouse, your children, regardless of age or financial dependency, someone who was financially dependent on you on your death, someone who was in an interdependency relationship with you on your death. Death benefits can also be paid as a pension. Pensions from your superannuation fund aren’t to be confused with Age Pensions from Centrelink! Superannuation funds can pay pensions (typically account-based pensions). These are regular payments from your superannuation benefits to the beneficiary. These can be very tax effective. The range of permitted pension beneficiaries are restricted to: a surviving spouse, a child that is under 18 or between 18 and 25 and financially dependent on you when you die, a severely disabled child; or someone other than your spouse or your children that was financially dependent on you or was in an interdependency relationship with you at the time of your death.

Who decides who your benefits are paid to?

Many are surprised to know that your superannuation doesn’t automatically form part of your estate and therefore isn’t controlled by your will. The decision regarding who and how your superannuation benefits are paid rests with trustees. Each superannuation fund has a trust deed which has a set of rules for that fund. The trustees, when deciding who to pay the benefits to, need to take the law and these fund rules into account. There are some situations where the trustees have no choice at all in who they pay the benefits to or how. Binding Death Benefit Nominations can be put in place by members to direct the trustees how and to whom the benefits must be paid. These can form a very important part of estate planning. They need to be prepared carefully considering where you want your super to go and any taxation consequences. If receiving a pension from your superannuation, you can nominate someone, typically your spouse who’ll continue to receive your pension after your death. This is referred to as a reversionary pension. Importantly, there are limitations on who can be a reversionary pensioner. When joining a superannuation fund, you’re given the opportunity to nominate who your preferred beneficiaries of your superannuation are. This isn’t binding on the trustee and shouldn’t be confused with binding death benefit nominations.

How are death benefits taxed?

Your superannuation benefits consist of two components: a tax-free component which represents contributions you’ve made, which you haven’t claimed a tax deduction for over time; and a taxable component which is everything else. This taxable component represents all the contributions you’ve made which you claimed a tax deduction for, and the accumulated earnings generated over time which have been concessionally taxed.

Lump Sums

Lump sums paid to dependent beneficiaries such as your spouse, children under 18 and financially dependent children over 18 are tax free regardless of the components. When paid to adult children who are not financially dependent, any tax-free component is tax-free. The taxable component is taxed at a maximum rate of 15 per cent plus Medicare levy. If there’s a life insurance component and the deceased was under 65, tax of 30pc plus Medicare levy will be payable. Where a lump sum is paid to your estate, the estate may need to pay tax on the benefit depending on who’ll be the ultimate beneficiary.

Pensions

The tax treatment on pensions depends on the age of the member on their death and/or the age of the recipient. If the member was 60 or over at death, the pension is tax-free regardless of the age of the recipient. If the member was under 60 on death but the recipient is over 60, the pension payments are also tax-free. If both were/are under 60, the pension is taxed at marginal rates less a 15pc tax offset with an allowance for any tax-free component.

Call the team at Flor-Hanly in Mackay or visit https://www.florhanly.com.au/self-managed-superannuation-funds. 

The information contained on this page is of a general nature only.  We recommend that you seek professional advice prior to making any changes to your superannuation.  This information should not be perceived to be advice, as we have not taken into consideration your needs, objectives or your current situation.