1 Oct 2015
Most people know they can transfer their property, money and personal effects to their dependants and others through their Will. But can you do the same with your superannuation? Is it enough to direct it to others via your Will? And do you know the tax implications if your remaining super funds are distributed to your dependants and other beneficiaries?
In practice, it takes more than a mere mention in your Will to direct super funds to your beneficiaries, so it’s important to consider superannuation within your ongoing financial and estate planning.
Here are some of the issues to think about.
The nuts and bolts
If you die before all your super assets are withdrawn, your super fund pays a death benefit to your dependants or estate. Death benefits include the balance of your super account, plus an insurance benefit if you have been paying life insurance premiums through your super fund. The total payout may also be increased by a refund of contributions tax paid during your lifetime. This refund is referred to as an ‘anti-detriment death benefit payment’.
While a spouse or dependent children pay no tax on super death benefits, adult children and other beneficiaries who are not financial dependants may pay tax of 17 per cent (including Medicare), on the taxed element of the taxable component of your super benefits and 32 per cent on the untaxed element. The taxed component includes any eligible termination payments you’ve received and salary sacrifice and personal contributions you’ve made.
If death benefits are paid into your estate they may be taxed up to 31.5 per cent.
Who is eligible to receive your super?
Super is one of a handful of assets that lie outside your Will and there are strict rules governing who can inherit this money. Generally speaking you can nominate your dependants or your estate, but for superannuation purposes the tax definition of dependants is quite specific. Dependants include your spouse, de facto or same sex partner, dependent children and anyone who is a financial dependant or was in an interdependent relationship with you at the time of your death.
The rules are slightly different for anti-detriment death benefits. However, not all funds pay these benefits so if you’re unsure about where your fund stands on this, please contact your PSK Financial Adviser.
Tying things up
The nomination of your beneficiaries requires careful thought. You can make a non-binding nomination which acts as a guide to your wishes but can be overturned by the fund trustees, or a binding nomination which can’t be challenged, if validly made. To be valid, it must be witnessed by two non-beneficiaries, renewed every three years, and directed towards an eligible dependant or your legal representative, usually the executor of your estate.
If you want your super to pass on to your partner tax-free, it is a good idea to make a binding nomination in their favour rather than have the money go into your estate.
If you are receiving an allocated pension it is often recommended that you nominate a reversionary beneficiary for the income stream. Following your death, the reversionary beneficiary can continue to receive the pension rather than have it paid out as a lump sum. Keeping the money in the tax-free super environment can mean significant tax savings.
Even when you are over 60 and receiving a tax-free super pension, tax may still be payable from your super if you die after a divorce or if your spouse pre-deceases you, and your super then passes to non-dependants such as adult children. However, with the help of your Financial Adviser, you could employ a withdrawal and re-contribution strategy at pre-retirement to minimise or completely reduce this tax.
Example: a winning strategy
John, 64, is a retired architect and widower with one independent adult daughter, Marie. John has a superannuation policy made up of the following components:
Taxable component: $380,000
Tax-free component: $20,000
John has made a binding nomination with Marie nominated to receive his total super benefit when he dies. As things stand, Marie would pay tax of $64,600 (17 per cent of the taxable component), leaving her with $335,400.
Now look what happens if John uses a withdrawal and re-contribution strategy.
As John is over 60 he can withdraw his total super benefit tax-free and re-contribute the funds as a non-concessional contribution. If John was to die immediately after putting this plan into action, Marie would receive the entire $400,000 tax-free, saving her the projected $64,600*.
However, if the fund provides anti-detriment payments, implementing the re-contribution strategy may negate any benefit afforded by the anti-detriment payments.
When it comes to super, the optimal estate planning strategy depends very much on individual circumstances.
If you have any questions or wish to meet with your Financial Adviser, please contact us. We also have access to estate planning experts who can ensure your superannuation is distributed according to your wishes when you pass on.
* Care needs to be taken that these tax savings are not outweighed by the loss of anti-detriment death benefits which can only be paid on the taxable component. Marie could potentially receive an additional $67,059 in anti-detriment payments, boosting the total death benefit payout to $467,059. After tax she would receive $391,059. Nevertheless, in this example she is still better off by $8,941 ($400,000–$391,059) if John goes ahead with a withdrawal and re-contribution strategy.