Your superannuation can't be included in your will unless you've specified certain instructions with your super fund first.
You may not be aware that how and in what proportions your super is distributed can’t be covered in your will unless you’ve made the necessary arrangements with your super fund beforehand.
One of life’s biggest mysteries is what happens when we die - and while I can’t answer that, what I can answer is what happens to our super when we die.
Unlike money, assets and property, which are distributed through a will -super funds generally need to be instructed on how to distribute your super savings. This is known as the “superannuation death benefit”. Catchy name.
The people who can receive your superannuation death benefit are known as beneficiaries. There are many different types of beneficiaries: dependants, including a spouse or partner, kids, financial dependants, interdependent relations, or an estate or a legal representative - known as an executor – but definitely not a pet! Cats in particular are terrible with money. They’re selfish, they’re lazy, and sometimes they miss the tray. If you don’t have any dependants, or legal representatives, your super savings may eventually be paid to the government. But, provided you do, how a beneficiary receives super benefits depends on the type of nomination…
There are a few different types of nominations;
- there’s the binding nomination - where the people nominated receive the proportions as specified by you. Binding nominations do expire though and need to be renewed every three years.
- A non-lapsing binding nomination – similar to a binding nomination, except that it never expires.
- A non-binding nomination – where the people nominated should receive the death benefit, however, the trustee of the super fund will get the final say. So the result could be very different.
- Or no nomination, where the superannuation death benefit will either go to an estate, or the trustee of the super fund will determine who the beneficiaries are.
Your estate can also be nominated in the other types of nominations too. The process of nominating a beneficiary will depend on your super fund, so for more information, make sure you talk to your super provider. That’s what I’m going to do… at least I know that “Mittens” won’t get my super.
What is a beneficiary in superannuation?
A superannuation beneficiary is someone who can receive any proceeds from your super account when you die. By nominating a beneficiary, you’re telling your super fund who you’d like yours to be. There are different types of beneficiary nominations
Why can’t super be covered in my will?
Your super can’t typically be covered by your will because your will only covers assets you own personally (things like, your house, car, investments, savings and personal items). Your super on the other hand is held for you in a trust by your super fund trustee and governed by superannuation law, which is why different rules apply and why your super fund must be kept up to date with your instructions.
Who can I leave my super money to?
In the event of your death, your super fund must pay a death benefit to one or more people in your life who are eligible. Your eligible super beneficiaries might include1:
- your spouse (including de facto and same sex partners), but not former spouses
- your children regardless of age
- anybody financially dependent on you when you die
- your estate or legal personal representative.
One reason you might nominate your estate or legal personal representative is you can then specify in your will how and to who you want to distribute your super money to, which can include eligible beneficiaries (mentioned above), as well as other people in your life.
It’s important however that you ensure the information stated in your will is up to date, so your legal personal representative pays out your super money as per your instructions.
How do I nominate my beneficiaries?
When it comes to specifying your beneficiaries, most super funds will give you several options. These options are important to understand, particularly given that the type of nomination you choose could give you greater control over how your super benefits are distributed.
If you make a binding death benefit nomination that satisfies all legal requirements, the trustee of the super fund must pay your super to the beneficiaries you have nominated, and in the proportions specified.
You should also know that there are lapsing and non-lapsing binding nominations. Lapsing nominations typically expire every three years unless you renew them, while non-lapsing nominations may never expire.
If your super is with AMP, we’ll let you know when a lapsing binding nomination is about to expire, but you must make sure your contact details are up to date.
If you make a non-binding nomination, the trustee of the fund will have the final say over which beneficiaries receive your super and in what proportions, but your nominations will be considered.
Depending on the product, if you don’t make a nomination the trustee will pay your death benefit to your estate, or use its discretion to determine which eligible beneficiaries the money should go to.
Super in pension phase already?
If your super is already in pension phase, then all of the above plus additional options may be available and need to be considered.
Will the money be taxed?
Different tax treatment can apply depending on whether your super is paid as a lump sum, income stream or mixture of both, and if your beneficiary or beneficiaries are classified as ‘tax dependants’.
A tax dependant includes2:
- current and former spouses and defactos
- any children of the deceased who are under the age of 18
- any other financial dependants.
Paying super death benefits as a lump sum
Lump-sum super benefits paid upon your death to tax dependants directly, or via your legal personal representative, are not taxed, whereas super benefits paid to non-tax dependants may be3.
For non-tax dependants, tax will only be payable on any taxable component of the lump-sum super benefit, which may include both a taxed and/or untaxed element.
The taxed element is subject to a maximum tax rate of 15% plus the Medicare levy. The untaxed element is subject to a maximum tax rate of 30% plus the Medicare levy4.
Note, an untaxed element will typically only arise where the death benefit includes proceeds from a life insurance policy held by the fund, or where the death benefit is being paid from an untaxed super fund, for example certain government sector superannuation funds.
Paying super death benefits as an income stream
Where the death benefit is paid in the form of an income stream, the tax treatment depends on the age of the deceased and/or the age of the beneficiary.
If super is paid from a taxed superannuation fund (and you or the recipient are aged 60 or over at the time of your death) it’ll be paid tax free5.
If you’re both under age 60 at the time of your death, the taxable portion of income stream payments will be counted as assessable income for your beneficiary, but they’ll be entitled to a tax offset equal to 15% of this amount. When they turn 60, the income stream will become tax free6.
If the death benefit pension, however, is paid from an untaxed fund, the taxable portion of pension payments received by a beneficiary under age 60 (where you’re also under age 60 at the time of your death) will be taxed at the beneficiary’s maximum tax rate, with no tax offset.If you or your beneficiary are over age 60 at the time of death, the taxable portion of pension payments will be eligible for a 10% tax offset.
Other things worth noting
Children over the age of 25 (other than those with a permanent disability) cannot receive super death benefits as an income stream. And, if they do receive a death benefit pension from an earlier age, they’ll typically need to cash it as a lump sum by the time they turn 257.
Meanwhile, changes to the super rules may further restrict your ability to pay a death benefit pension to your beneficiaries, as a result of the pension transfer balance cap. This cap broadly limits the amount that can be transferred from super into pension phase.
What to do now
To ensure you have appropriately nominated beneficiary arrangements in place for your super money:
- Check your super fund offers beneficiary arrangements that suit your circumstances
- Check those who you’re nominating are eligible
- If you plan to nominate your legal personal representative, make sure your will is up to date
- Complete and sign a nomination of beneficiary(s) form and send the form to your fund
- If your nominations are lapsing, make sure you review and renew them before they expire.
When you’re considering who you’re going to leave your super to, it’s important to think about the people who matter most and how tax implications may affect the amount they could receive.
The tax treatment of super can be complex so if you need assistance, speak to your financial adviser. And, if you don’t have one but would like some advice on the matter, contact AMP on 131 267, or use our find an adviser search function.
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