"I have nominated my beneficiaries for my superannuation, should anything happen, but I've been told there may be more to the process. How do I ensure payment goes to those I've nominated?"
- Question from Cathy in Rosewater, SA
Top answer provided by:
Matthew Rea
Hi Cathy,
Great question! We get this one a lot from our clients and we're always happy to give advice on it. Nominating your beneficiaries is important to ensure your assets go where you intend. But when it comes to your superannuation, there are some extra things to think about, as you mentioned.
Superannuation money passes to your beneficiaries differently than the rest of your assets (which generally go through your will). Superannuation funds can only pass to certain people, called ‘SIS dependents’ as defined by superannuation law.
Who can be a beneficiary?
In short, only SIS dependents or your legal personal representative (your will) can receive your superannuation. A SIS dependent is a person who is dependent on you, as defined by the SIS Act (which governs the rules for our superannuation industry). The Act says a SIS dependent is a person who is “dependant, in relation to a person, includes the spouse of the person, any child of the person and any person with whom the person has an interdependency relationship.”
To put it simply, the following people in your life can be SIS dependents:
-your spouse (but not a former spouse)
-your children including adult children, even if they are financially independent (warning, see the tax treatment section) or
-a person who you are in an interdependent relationship with (think of another family member who you live with and share duties/finances with).
Making your wishes known
One of the jobs of your superannuation fund is to decide where your funds (called the ‘death benefit’) should be paid upon your death. This is a scary thought isn’t it, personally, I don’t want my super provider to be making that decision. The way this can be avoided is by instructing your super fund of your wishes, using a ‘binding death benefit nomination’. This is done with a physical form from your fund that is usually witnessed by two people.
A binding death benefit nomination (if done correctly) instructs your super fund where the funds should be paid. It can be broken between multiple ‘beneficiaries’ or all paid to the same spot. It can even be directed to your will with the rest of your assets (although it may not make sense to do this, seek estate planning advice beforehand). Making a ‘binding nomination’ means that your super fund is bound to follow your valid nomination. The alternative is a ‘non-binding nomination’, which is more of a suggestion and your fund will still gather evidence and decide which beneficiary should receive the money.
If you don’t make a nomination, or you make an invalid nomination, the trustee of your superannuation fund will generally make the decision based on evidence that they can obtain to determine who your SIS dependents were.
But don't just fill out the form and forget about it! Life can be unpredictable, and significant changes (like getting married, divorced, or having kids) can make your nomination invalid. And some funds even put an expiration date on your nomination. So, keep that form updated and make sure it's still valid!
You should also consider that life insurance being paid through superannuation will need a separate binding nomination to instruct that trustee where to pay your insurance proceeds upon your death.
It is important to ensure that your will is consistent with your beneficiary nominations so that conflicts don’t arise between the two instructions.
Tax treatment of your superannuation upon death
When considering who you nominate as your death benefit beneficiary you should also consider the tax consequences. If your superannuation funds are paid to non ‘tax dependents’ they may be liable to pay death benefits tax. I know, it's a bit confusing, but ‘tax dependents’ are different from ‘SIS dependents’.
A tax dependent differs from a SIS dependent in a couple of ways. Your spouse is a tax dependent; a former spouse could also be a tax dependent. All your children under 18 are tax dependents. And anybody financially dependent or in an interdependency relationship with you is as well. But your financially independent adult children are not tax dependents. This means they will be likely to pay ‘death benefits tax’ on the taxable component of your superannuation funds (up to 32% of your balance). There are strategies to reduce this tax, which can result in large tax savings. I would recommend seeking financial advice to explore this further.
Good luck absorbing this information Cathy, it is important stuff. I would strongly encourage you to seek financial advice on how to best arrange your assets, plus legal advice from an estate planning specialist lawyer for information on how your superannuation forms a part of your overall assets.
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