Protect your loved ones

Ensuring the people you love are provided for financially in the event of your death is essential.

Other than your home, your biggest asset is probably your super and a will is not enough to secure how your superannuation will be distributed. Doing the ground work now could reduce the risk of conflicts arising over the proceeds of your estate. It can also iron out misunderstandings about your intentions and ease the stress of dealing with financial issues on top of the loss of a loved one.

If you haven’t made the necessary arrangements, it will be up to your super fund’s trustee to decide how to distribute your super. That’s why it’s important to have a valid and binding nomination of beneficiaries for your super fund to ensure your dependants are cared for.

Who is a ‘dependant’?

'Dependant' has a different meaning under super law and tax law. 

An adult child (18 years of age or more) can be considered a ‘dependant’ under super law, which means that he or she can receive a death benefit from a super fund. However, adult children are generally considered to be ‘non-dependants’ under tax law and any superannuation death benefits they receive will be subject to tax.

By contrast, a ‘dependant’ under tax law does not have to pay tax on a lump sum death benefit.  Under tax law, dependants can include your spouse (including de facto spouse), children under the age of 18, any individuals (including adopted children, stepchildren, or ex-nuptial children or adult children) who are financially dependent upon you or have an interdependent relationship with you. 

There are several things you can do to ensure your superannuation death benefits go to the people you have chosen.  

1.     Binding nominations

Some super funds offer binding nominations, which are generally the best way to ensure your super fund trustee follows your instructions. This means the super fund trustee will pay the superannuation death benefit directly to those individual(s) you have nominated, or your estate/legal personal representative, provided your nomination is valid.

If your circumstances have changed (e.g. marriage, divorce), consider updating your nominations to ensure they remain relevant. Remember to reconfirm your binding nominations every three years; otherwise they will cease to have effect.

2.     Tax implications

Under tax law, non-dependants will be subject to tax on any superannuation death benefit they receive.

However, there may be a ‘tax-free component,’ which is always tax free regardless of who it’s paid to, because this component reflects ‘after-tax’ contributions made to the fund. The balance of the payment is called the ‘taxable component,’ which is subject to tax when it’s paid to a non-dependant. 

3.     Insurance payout

If your superannuation death benefit also contains an amount representing an insurance payout from insurance held in super, then some or all of this payout as a lump sum to non-dependant beneficiaries may be assessable income. In these circumstances your beneficiaries will be entitled to a tax offset that ensures that the rate of tax on this amount does not exceed 30 per cent (plus a 1.5 per cent Medicare levy).

There’s a lot to think about when it comes to deciding what to do with your super. It’s your super and it’s your decision, and thinking about it now could be the way to ensure protection for your loved ones.

Please call us today to ensure your super goes where you want it to.

What you need to know

This article contains general information only. It does not take into account your objectives, financial situation or needs. Please consider the appropriateness of the information in light of your personal circumstances. If you decide to purchase or vary a financial product, your financial planner, our practice, AMP Financial Planning and other companies within the AMP Group will receive fees and other benefits, which will be a percentage of the premium you pay and/or the advice fee you agree with us. Some of the information in this article is based on our interpretation of the law. It is a summary of the subject matter covered and is not intended to be comprehensive tax or financial advice. No reader should act on the basis of this article without obtaining specific professional advice. Further details are available from us, or AMP Financial Planning Pty Limited on telephone 1300 157 173.