Why it’s important to understand how death benefits would be paid on your super fund

Category: Australia

Thinking about your own mortality is never easy, but planning your legacy and what happens to your wealth and assets when you pass away should be an important part of your planning.

Doing so isn’t just about you – it’s about your loved ones and their financial futures.

Your accrued super fund, which will provide you with income once you stop working, is likely to form a major part of your wealth.

Therefore, it’s important to understand what will happen to your funds when you pass away, and how you can ensure that the value passes to the beneficiaries you have chosen. Otherwise, this decision could be made by a third party.

Read on to find out more about your Australian super fund and what will happen to it on your death.

The legal structure of super funds mean they sit outside your estate

All super funds are held in a trust that will be managed by trustees on behalf of the provider, rather than being owned by you personally.

This applies if you are a member of a large corporate scheme, or if you have set up your own Self- Managed Superannuation Fund (SMSF).

Because of this, your super fund will not necessarily form part of your estate or be included under the terms of your will.

As a result, your accrued fund may not automatically be treated in the same way as your other assets in the event of your death.

Typically, the trustees will pay any death benefits to your spouse or civil partner. However, it is always important to bear in mind that if you have complicated arrangements, you’ll need to make a legally valid declaration stating who the benefits should pass to. If you fail to do this, then the trustees will have discretion over where the benefits are paid.

This is especially important if you have previously been divorced, are separated and have not yet remarried, or if you are a widow.

Usually, superannuation death benefits can be paid to dependants or the executor or administrator of your estate.

Most super funds will allow you to make a binding nomination in respect of your death benefits that will avoid any future disputes and ensure that your super and any associated life insurance pass to your intended beneficiaries. However, you should be aware that any binding nomination you make in respect of funds you hold in a Qualifying Regulated Overseas Pension Scheme (QROPS) could create potential Inheritance Tax issues in the UK.

If you have nominated a legal personal representative, it is important to inform the executor of your estate about your intentions to ensure that the death benefits from your super are distributed according to your wishes.

Super death benefits can usually be paid as a lump sum or as income

If your nominated beneficiary is a dependant of yours, generally any death benefits can be paid as either a lump sum or as a regular income.

If you select the income option, the value of your fund on your death will remain within the scheme,  so that the income can be administered by the trustees. This will also ensure that the fund from which any income is derived will still be subject to investment growth.

With a reversionary pension, your existing super pension continues to be paid, but it reverts to your nominated beneficiary. It will remain within the scheme, but you can move it in the future

However, if your chosen beneficiary is not a dependant of yours, the death benefits must be paid directly to them and cannot be retained in the super fund.

You can set up a reversionary nomination if you are already receiving income from your fund

If you’re already in receipt of income from your super, such as an account-based income stream or a “Transition to Retirement” account, you can elect for those income payments to continue to your chosen beneficiary.

This is known as a “reversionary nomination” and will ensure that payments continue until the value of your fund is exhausted.

The balance of your account stays with the super fund to maintain the benefits of the account.

However, it’s important to note that you can only make such a nomination at the commencement of the account-based pension, and you cannot add or amend a nomination at a later date.

It’s important to review your beneficiary arrangements regularly

Your super death benefit arrangements will likely form a key part of your regular estate planning and legacy reviews.

It’s clearly important to ensure that you keep your nominations up to date, so that they accurately reflect your circumstances and wishes.

If you have your own SMSF, you will either have individual trustees, including maybe yourself and any other members of the fund, or most likely (because of the estate planning benefits) corporate trustees.

Regardless of the trustee structure, as part of your estate planning you should include reviewing the trust deeds and death benefit nomination regularly to ensure they are fit for purpose, particularly with regard to your own arrangements.

Obviously, as well as checking your will and other legacy planning arrangements, you can review who will inherit your super at any time.

It’s particularly important to make a point of reviewing your beneficiaries after big changes in your circumstances, such as:

  • Marriage or entering into a civil partnership
  • The death of a close relative
  • Divorce or separation
  • The birth of children.

We would also strongly recommend that you get expert advice when it comes to all your legacy planning arrangements. The details can sometimes be complicated, and so it’s sensible to have someone working with you who understands your specific requirements, and to ensure that your arrangements align with your objectives.

Get in touch

If you want to discuss any of the issues you’ve read about in this article, please get in touch with us.

Please note

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

This article is for information only, it does not take into account your personal objectives, financial situation, or needs. Please do not solely rely on anything you have read in this article and ensure that you conduct your own research to ensure any actions you may take are suitable for your circumstances.

All contents are based on our understanding of ATO legislation, which is subject to change.