What you should (but don't) know about super
Superannuation may be one of the most important income streams once a person is retired but there’s one fact that’s escaped many Australians. Don’t be one of them.
A will may be the legal document that sets out where or to whom you’d like your assets to go, but one thing it doesn’t cover is super.
What if there’s no beneficiary?
If there is no stipulated beneficiary on your super account, under law the fund’s trustee is required to pay benefits to your dependents where possible. According to Richard Webb, policy and regulatory analyst at the Australian Institute of Superannuation Trustees, trustees are obliged to act in the best interests of the member.
They will gather information to help them decide on which dependant or dependants may be entitled to receive the benefit, and then who will actually receive the benefit and what proportion they are entitled to.
“If the trustee becomes aware of a potential ‘inter-dependent’ relationship, they are then required to write to all potential beneficiaries to ascertain whether there will be any objections to the proposed split. This is called ‘claim staking’ and the beneficiaries have 28 days to lodge an objection,” Mr Webb explains.
“We recommend that members nominate a beneficiary, and update this beneficiary when their circumstances change. If the trustee is unable to locate a suitable dependant to pay the benefit, they will then pay the estate. If a valid will is in place, the money will then be distributed in accordance.”
When nominating a beneficiary, there’s a few key considerations to keep in mind such as the relationship between you and the person you nominate, as well as the likelihood of the trustee paying your nominated person the money.
There can be significant tax ramifications on the funds depending on who you nominate, so if it’s a spouse or dependent child they’ll be able to receive the payout tax free, but if it’s a child that’s independent the money will be subject to a 15 per cent tax plus medicare levy.
The other thing to keep in mind is that while you can nominate someone that isn’t a dependant, it can be more difficult for them to actually be awarded the money, as it’s harder for the trustee to justify why. Mr Webb says arrangements such as leaving money to charity are also unlikely to be awarded.
What are your options?
Super fund members can make a nomination of preferred dependent, which means the trustee will take note of who you listed, but they’re still bound to act in the members’ best interests.
“This means they are still legally bound to find out if there are any other people who might meet the definition of a dependant, and then decide which of these people should get the money,” Mr Webb says.
Joshua Stega, director of Sydney-based boutique wealth management firm Jas Wealth, explains that while the trustee of your fund has the discretion to distribute your super to the beneficiaries they determine are the most appropriate if you pass away, there’s a chance it will not be distributed to the people you intend.
“Superannuation is a special trust structure designed for accumulating and later paying retirement benefits,” he reveals. “Despite the best intentions of the trustee, there is still a chance that your superannuation will not be distributed to the people you intend.
“I heard of a case the other day when a young father passed away suddenly and his superannuation was left to his children, aged three and five years, not his wife. This is despite the financial turmoil the sudden death has put on the young family with a sizeable Sydney mortgage. This is a risk you take if you do not take the right steps to direct your superannuation.”
Make your choices now
Taking the time to plan ahead and get your affairs in order, not just for super, is important. While there are a few elements to consider in the estate planning process, getting your nominations sorted is relatively straightforward.
Mr Stega says all you have to do is contact your super fund and ask them to make a binding death benefit nomination. This binding nomination tells the super fund trustee who gets your death benefit, so you choose whether the money goes to one or more dependants, or your legal representative, who must pay out the money according to your will.
A non-binding nomination stipulates who you would like to get the super benefits, but the trustee has the final say.
“When it comes to estate planning you only need to hear one example of a situation when things didn’t work out as planned to know you need to get your affairs in order. You have worked hard to build assets for your retirement, don’t let your legacy be eroded by poor estate planning,” Mr Stega explains.
“This is something we do in our business as part of the estate planning process. In saying that you could easily sort your superannuation nominations out first (because they are relatively easy) and work on your broader estate plan later. At a minimum have a death benefit nomination in place for your superannuation.”