What happens to my money when I die?
The compulsory superannuation system is celebrating its 30th birthday this year. For most people, it has been in place for their entire working life. Despite this, it’s still a bit of mystery to many – particularly death benefits.
The balance may be pretty substantial. If retirees have been drawing on the capital at five or six per cent a year then, after earnings, there may have been little reduction in the balance.
The first thing to remember is that for all superannuation funds – whether self-managed, retail or industry – members can nominate whom the money goes to. This can be done through a binding nomination (which means the trustee must pay it in the way nominated) or a non-binding nomination. Some retail and industry funds don’t allow binding nominations.
If the super benefit goes to a spouse, some funds may insist on paying it as a lump sum.
Another key point is that superannuation benefits do not automatically form part of an estate. However the nomination can specify that the balance is paid to the estate, and then the will determines the beneficiaries.
Alternatively, a direct payment can be made to a “superannuation dependant”. This must be a spouse, child, or someone with whom there was an interdependent relationship.
Next are the tax considerations. The tax treatment of death benefit payments differs depending on whether the recipient is a “tax dependant”. Tax dependants are confined to the deceased’s spouse (including an ex-spouse), children under 18, an interdependent person or a financial dependant. These dependants will receive the superannuation death benefit tax-free; others will incur some tax.
Some common examples include:
If paid to a surviving spouse: a spouse nominated as the beneficiary of the super fund can receive the remaining balance as a tax-free lump sum.
It is also possible that the benefit may be retained within superannuation and paid as a pension, but the rules of the fund may impinge on this flexibility, so it’s worth checking. Some funds may insist on paying it as a lump sum.
If it is to be paid as a pension and the spouse is already receiving a superannuation pension of their own, they may need to rearrange their superannuation so they don’t breach their pension fund cap.
Another important consideration, which is not well understood, is that if the deceased has a superannuation balance over the pension threshold in an accumulation superannuation account, then the amount over the threshold must be paid as a lump sum. This can be quite stressful for those who haven’t developed a plan for what to do with such an amount, and especially if they are still grieving the loss of a loved one. So it’s worth having a plan for this situation.
If paid to adult children: if it is being paid to someone over 18 (or under 25 and still financially dependant), it must be paid out of superannuation as a lump sum – it can’t be retained in superannuation and paid as a pension.
At this point there is tax payable. A bit like a death tax, it’s levied at 15 per cent on the taxable portion of the super benefit. This may not sound like a lot, but it can add up.
For instance, if there is $1 million left in superannuation upon death with 40 per cent in the tax-free part (essentially after-tax contributions made, minus drawdowns) and 60 per cent as a taxable component, then this incurs a tax bill of $90,000. If paid to individuals, the Medicare levy of two per cent is also payable. However if it is paid to an estate and then paid to beneficiaries, there is no Medicare levy.
Interestingly, if someone was planning ahead (perhaps due to a terminal illness) and had taken the $1 million out themselves as a lump sum and gifted it to their beneficiaries, no tax is payable. However getting the timing right can be fraught with difficulties.
A further benefit of having superannuation paid to an estate is that if the will establishes testamentary trust for beneficiaries, the superannuation can be added to those trusts.