Superannuation, or ‘super’, plays a pivotal role in securing a comfortable retirement for millions of Australians. However, an often overlooked aspect of superannuation planning is what happens to these funds upon the account holder’s death. When planning for retirement, it’s crucial to understand not only how to grow your superannuation but also what happens to your super when you pass away. One of the key aspects of this is the tax on super death benefits. This article delves into the details of this important topic.

What are Super Death Benefits?

Super death benefits are the funds that are paid out from your superannuation account when you die. These benefits can be paid to your dependents or to your estate, depending on your superannuation provider’s rules and your personal circumstances.

Super death benefits can be paid to dependents, including your spouse or de facto partner, your children, or anyone who was financially dependent on you at the time of your death. If you don’t have any dependents, your super death benefits can be paid to your legal personal representative, who will distribute the funds according to your will.

How are Super Death Benefits Taxed?

The tax treatment of super death benefits depends on a variety of factors, including who receives the benefit, the components of the benefit, and whether the benefit is taken as a lump sum or as an income stream.

If the beneficiary is a dependent, such as a spouse or a child under 18, the super death benefit is usually tax-free. This applies whether the benefit is taken as a lump sum or as an income stream.

For non-dependents, such as adult children, the tax treatment is different. If the super death benefit is taken as a lump sum, the tax-free component is still tax-free. However, the taxable component could be taxed up to 15%, plus the Medicare levy.

If the super death benefit is taken as an income stream, the tax-free component is still tax-free, but the taxable component is added to the beneficiary’s assessable income and taxed at their marginal tax rate.

The Importance of Tax Planning

Understanding the tax implications of super death benefits is crucial for effective estate planning. By planning ahead, you can potentially minimise the tax payable on your super death benefits and maximise the benefit for your loved ones.

For instance, you might consider strategies such as withdrawing your super and gifting it to your adult children while you’re still alive, which could potentially reduce the tax payable compared to leaving the super in your fund until you die.

However, it’s important to note that this strategy has its own tax implications and risks, and it’s crucial to seek professional advice before making such decisions.

Binding Nominations v Reversionary Pensions

A binding nomination is a legal document that allows you to decide who will receive your super benefits in the event of your death. If valid and in effect at the time of your death, the trustee of your super fund must pay your death benefit to the beneficiaries you have nominated and in the proportions you have set. Without a binding nomination, the trustee has discretion in deciding who receives your super benefits, which may not align with your wishes. Therefore, it’s crucial to not only make a binding nomination but also to review it regularly to ensure it remains current with your personal circumstances.

A reversionary pension is a type of income stream that continues to a nominated beneficiary (usually a spouse) after the death of the original pensioner. This can provide financial security for the surviving partner, ensuring they continue to receive a regular income. However, it’s important to understand the eligibility requirements and potential tax implications of reversionary pensions.

Estate Planning For Blended Families

In today’s society, blended families—comprising of step-children, multiple ex-spouses, and shared custody arrangements—are increasingly common. This can complicate estate planning, including the distribution of super death benefits. For instance, ex-spouses and step-children may have legal claims to your super. Clear communication and careful estate planning are essential in these situations to ensure your super is distributed according to your wishes.

The Importance of Financial Advice

Given the complexities and potential tax implications of super death benefits, obtaining professional financial advice is crucial. A financial adviser can provide personalised advice tailored to your circumstances, helping you navigate the complexities of superannuation law, tax regulations, and estate planning. They can assist you in making informed decisions about binding nominations, reversionary pensions, and other aspects of your super.

Planning for what happens to your super when you die is a critical aspect of retirement planning. By understanding the tax implications of super death benefits, making a binding nomination, considering the use of reversionary pensions, and seeking professional financial advice, you can ensure your super benefits are distributed according to your wishes. Remember, it’s never too early or too late to start planning for your future.