30th Apr 2018
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Super – who gets what?
Author: Olga Galacho
Super – who gets what?

Super fund balances are a preoccupation of all Australians, especially given the recent share market volatility. Yet people tend to focus less on what happens if you die before you retire. How can you make sure your family receive your fortune?

Now that most of us have it, even though the amounts we have vary greatly, superannuation is a common topic of conversation, rivalling what is happening in the real estate market. We talk about how much our super nest egg earns from investments, how much we will need to retire comfortably, whether we will have enough to last us into our 90s and, most of all, what we will do with it when we get our hands on it.

Less is said about the death cover included in the super package. All employer-funded and retail super funds have this second string to their bow: an attached death benefit that pays out if we don’t last the distance to retirement. But this tends to get scant attention, even though it can make a big difference to our dependents if such a death does occur. All too many of us forget to ask these two important questions when we join a super fund:

  • Will I have sufficient super savings, including life insurance, to cover my family’s needs should I die before retirement?
  • Who can receive the death benefit paid from the super fund?

Importantly, it is often assumed that the death benefit payable from a superannuation fund automatically forms part of our estate and is treated the same way as other assets. This is not the case. Two characteristics that distinguish it from estate distribution are the taxation benefits arising from superannuation, and the fact that superannuation benefits generally enjoy protection from any creditors a member may have at his or her time of death. So it is that super-related death benefits receive special treatment.

What will be ‘sufficient’?
Each employer-operated, industry and retail superannuation fund usually includes a minimum-insured death benefit, the premiums for which are paid from your super contributions. The amount of cover can be a flat amount or it can be a multiple (e.g. three times) of your annual salary.

This cover is automatic and does not require you to undergo a medical examination, although you should look out for any exceptions that may disqualify your family from receiving the benefit (e.g. a pre-existing medical condition). Generally if you want to increase the amount of your insurance coverage you will need to complete a health-related questionnaire. When completing such a questionnaire, you must answer all the questions accurately and honestly, otherwise the insurer can refuse to pay out the benefit.

But will the minimum benefit be enough? While it is impossible to calculate the exact figure that is needed for ‘sufficiency’, for most Australians, the answer to this question is ‘no’. The benefit received will be helpful but it will probably not provide sufficiently for your family’s needs – particularly if the family is young and the mortgage large.

Furthermore, most automatic policies provide for the amount cover to decrease with age, so that the death benefit at 65 years of age provided by insurance is zero and is replaced by the accumulated benefit that would be payable at either death or retirement at that point. It is assumed that, with age, your savings will have grown and consequently the need for life insurance coverage will have diminished. However, this is not always the case, especially where there is a large mortgage and where remarriage or re-partnering occurs and a second family is formed.

If you do opt for higher insurance cover it involves higher premium payments, which again come out of your super contribution.

Who can benefit? 
As the money you pay into superannuation is taxed at a lesser rate than other income, the government has limited the people to whom a superannuation benefit is payable. It may only be paid to your spouse (which includes a de facto spouse), your children, any person who depends on you for financial support, the executor of your will, a person in an ‘interdependency relationship’ with you or, if none of these apply to you, any other individual. That individual will, however, receive a benefit only if it is payable to others with a higher payment priority.

Most usually, payment will be made to a husband or wife and for children under the age of 18, although older children can receive a benefit if they are in full-time education. Financially independent children may, but are unlikely to, receive a payment, because dependents are given priority.

Within the above categories your fund may provide for you to either:

  • make a binding nomination of one or more beneficiaries, or
  • nominate your preferred beneficiary or beneficiaries, which is more common.

The information booklet provided by the fund will tell you if it provides for a binding nomination. If it does, and you make such nomination, then the trustee of the fund must pay the benefit in accordance with that nomination, regardless of who else makes a claim on your benefit. A binding nomination needs to be signed before two witnesses, neither of whom is a beneficiary, and must be renewed every three years. This means it involves more effort than the nominated beneficiary option, but it also ensures your wishes are carried out.

However, not all funds provide for binding nominations. If your fund does not permit binding nominations you will be asked to nominate your preferred beneficiary, from the categories mentioned above. The fund trustee will then generally take into account your nomination and:

  • who would have been likely to receive the benefit from your income had you not died, and
  • who you had a moral or legal duty to continue supporting.

 

Taxation
A super-related death benefit paid to a spouse, infant child, financial dependent or to someone in an interdependency relationship is tax exempt up to the upper limit of the deceased’s RBL (reasonable benefit limit, the maximum amount of super than be accumulated with tax concessions). By contrast, if the benefit is left to your executor to be distributed under the terms of your will, unless the recipient is on of those mentioned, it will not be tax free.

Are you eligible for an Age Pension? Do you know your rights? The RetirePlanner™ tool has all the information you need.

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    Financial disclaimer: All content on YourLifeChoices website is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. It has been prepared with due care but no guarantees are provided for the ongoing accuracy or relevance. Before making a decision based on this information, you should consider its appropriateness in regard to your own circumstances. You should seek professional advice from a financial planner, lawyer or tax agent in relation to any aspects that affect your financial and legal circumstances.





    COMMENTS

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    Charlie
    25th May 2018
    10:40am
    I got my super and I spent it, so i'm glad I didn't have to work thru all of this.
    Anonymous
    25th May 2018
    11:10am
    Good for you Charlie boy, now the rest of us get to pay taxes to support you - nice one - hope you had a great time!
    Kathleen
    25th May 2018
    11:00pm
    Big Al, how do you know he wasted it. He could have bought a house or got himself out of debt. You don’t even know how much it was and not everyone has a big super especially the older ones.
    Anonymous
    25th May 2018
    11:37pm
    Yes this country is full of bludger so like you Charlie
    Peterrj
    26th May 2018
    7:38am
    Roby, you call Charlie a bludger? That’s a harsh assessment. For most people, Super is cash related to your income that has been forcefully banked for you. That 9.5% employer contribution to your Super Account is ‘your income’ which you are not allowed to spend till, say, 60 years of age. It’s not your money nor my money that Charlie spent but ‘his’ money from his life time of savings having being prevented from buying and spending ‘his’ cash as he earn‘t it. But there is no guarantee that pot of saved cash will be there to spend later in life. As many learnt a hard lesson during the GFC, some lost most if not all Super savings. My wife lost half of her Super Balance just as she retired .... kid she is still not cranky about that. We don’t know how Charlie spent his money but I don’t begrudge him spending his money and I don’t call him a bludger.
    Anonymous
    26th May 2018
    5:17pm
    Peterrj you are obviously a person who works around the law to get yourself the full pension and enjoy it at the taxpayers expense I have principals and don,t want to be a freeloader like you I have no engagement with centre link at all I pay my own way but hate losers or bludgers I just wonder how many of your family line up for freebies.
    Peterrj
    26th May 2018
    11:40pm
    Roby, Whoa, how wrong can you be? I am disqualified for LIFE from ever getting one penny from the Aged Pension! How on earth can you possibly conclude ... ‘you are obviously a person who works around the law to get yourself the full Pension...’ ‘Obviously’? How did you make that conclusion? And family? Sorry to tell,you but they all work for a living. It’s a pity that so few make sensible comments in this posting.
    bike30
    29th May 2018
    10:18am
    Interesting reactions, however whatever Charlie does with his money, that's his business...different situations to different people...end of story.....
    Peterrj
    25th May 2018
    12:26pm
    Hi Big Al, all Charlie did was spend his savings, what could be wrong with that? However, it would have probably been an unwise move to spend all his Super?? The Super Goal is to have the Min Threshold in Assets or a whole lot more than the Max Threshold in assets (cash) at pensionable age. Do the maths and see the surprise answer as a yearly income.

    In round general figures to illustrate: married couple with own home, no savings get $35,000 in Aged pension plus say $5,000 in benefits. If they had $800,000 cash in super they would exceed the Max Threshold in assets and get NO aged Pension , so 5% of $800,000 is an income of $40,000/yr ... the same as having no assets. However, if smart, they have $400,000 in Super get $40,000 from Aged Pension PLUS $20,000 from Suoer ... $60,000 .., which bears the $40,000/yr having zero cash or $800,000 cash!
    Lark Force
    25th May 2018
    12:59pm
    Peterrj, Are you correct?- you say a couple with $400000 get more pension than a couple with no spare dosh.
    Sundays
    25th May 2018
    2:25pm
    Yes, that is correct. At $4000,000 you still qualify for the OAP. Of course if you have $800,000 you have more capital. One of the unintended consequences of the Govt reducing the Asset thresholds.
    Peterrj
    25th May 2018
    7:49pm
    Think of this, if the SFunded retiree has a mozta of $1.2m in Cash, at 5% then that gives the same yearly income as having $800,000 less in saved cash of $60,000/yr. To beat the smart Super saver of having only $400,000 you need $1.6 in Super to get a mere $20,000/yr extra income. Bet no one told you that! Super, after the Min Threshold is a poor investment option for some!!!! Please feel free to challenge my economically irresponsible conclusions! But back up your argument with facts and figures. Good luck.
    GeorgeM
    25th May 2018
    9:08pm
    Nothing new here, but thanks Peterrj for putting the issue out again. The numbers are slightly different, e.g,. current Asset Test limit for Couple Homeowners is $837,000 above which NO Age Pension. Besides that, the argument you present is well accepted, and shows why the Liberal Govt got it so badly wrong.

    Can't believe why many voters of retirement age were blind to the last Asset Test changes from Jan 2017 which created this mess, and this serious disincentive, rather punishment, for savers, and voted in the Liberal party.
    Can't believe some part-pensioners may still want to vote for Liberals (or even Labor who have refused to reverse that demonic change).
    Peterrj
    25th May 2018
    10:32pm
    George, you are correct ,’current Asset Test limit for Couple Homeowners is $837,000 above which NO Age Pension’. In my defense I was speaking in broard generalizations to get the message across. Plus, I was being big generous, who does not have more than $37,000 in assets excluding all cash money in Super?

    LOL (or cry) and I will of tell a lie, but with the new Total Super Balance restriction I can’t withdraw a penny from my Super Pension Balance as I don’t have a a penny in my Super Pension to withdraw.
    However, I can’t even put on one penny into Super due to the ever changing Supe rules. Riddle: See if you can explain why?
    johnp
    28th May 2018
    10:28am
    Yep, your right Peterrj. That $400K is the sweet spot. However I thought it was $380K or has the assets test gone up ?
    Old Man
    25th May 2018
    2:19pm
    I wonder if I am reading this correctly. It seems that superannuation funds provide a compulsory life insurance cover and the premium is paid for by the member. If what I read is along these lines then it is wrong. Yes, a lot of superannuation funds will automatically sign members up for life insurance cover as a default position and charge a premium. A member has to opt out of this, not opt in which cannot be described as compulsory. My understanding is that this has, or will, be outlawed by legislation where the default position will become opt in only.

    In one of my employments, I was forced to sign up with an industry fund and I was not asked to sign any application so when I received the statement, I queried the deductions for insurance. After a protracted battle, and with the help of the then ISC, I was able to have the premiums refunded together with the lost interest. My reason for the need to stop paying for life insurance was twofold; firstly I already had a life insurance policy and, secondly, the premium for the cover was about 2½ times what a reputable insurance company would have charged.
    Sundays
    25th May 2018
    2:29pm
    It is a tricky one. It’s usually a death and sickness cover. I dropped mine, but then a colleague got cancer and the super fund paid 85% of her wage while she stopped work to undergo treatment.
    Old Man
    25th May 2018
    3:22pm
    Yes, Sundays, insurance is a minefield. The policy above covered me for $5000, life only, and the premiums were $1.00pw whereas a premium for a reputable insurer for the same amount was $0.11¢pw.
    Knows-a-lot
    25th May 2018
    4:14pm
    It's a discriminatory system. I have no spouse, kids or dependents. Recently, I had my will made up and therefore was forced to leave my super death-benefit to my executor (who will then pass the money on to my younger brother). As you say, it will be taxed. So the system discriminates against single people.
    Cat
    25th May 2018
    4:35pm
    I'm thinking the same thing. If I die before I get my super, I want to leave it to a charity. It sounds like it will be taxed.
    Dancer
    25th May 2018
    5:47pm
    My single son with no children died at a young age and his super was also paid to the Executor to be distributed according to his will, despite the fact that he had nominated his brother as beneficiary. Unfortunately the Public Trustee did not tell him when he made up his will with them that he needed to arrange a Binding Nomination for his super to go to his brother. The end result is that several other beneficiaries in his will received part share of his superannuation, contrary to his specific and personal wishes. That is wrong.
    Dancer
    25th May 2018
    5:47pm
    My single son with no children died at a young age and his super was also paid to the Executor to be distributed according to his will, despite the fact that he had nominated his brother as beneficiary. Unfortunately the Public Trustee did not tell him when he made up his will with them that he needed to arrange a Binding Nomination for his super to go to his brother. The end result is that several other beneficiaries in his will received part share of his superannuation, contrary to his specific and personal wishes. That is wrong.
    Peterrj
    25th May 2018
    8:07pm
    No, no, no, there is NO relationship ‘binding’ between a Will and where your residual Suoer will go when you die. And yes, beneficiaries who are not dependents have to pay 15% (plus the Medicare levy?). THey are the Suoer rules, which aren’t so Super in Death!
    sunnyOz
    25th May 2018
    11:34pm
    Knows-a-lot - I agree. I too am single, no dependents but a VERY close friend with 3 children I am an 'adopted' nan to. I have worked bloody hard for what little super I have, but if I fall off the perch, who should my super be taxed again if I leave it to her? I have 3 wealthy brothers and a no-hoper sister who has never worked a day in her life, bludged off welfare and lives in a govt house. But I can guarantee they will be lining up to get their hands on anything I have left.
    One thing I totally abhor is people accumulating wealth to leave as an inheritance. I just hope and pray I die the day after all my super runs out!
    Peterrj
    26th May 2018
    7:10am
    SunnyOZ, no, don’t think that as realistically Super cash won’t go very far. But if you die before it runs out then ‘someone’ Will inherit the remaining cash. Your Will will not necessarily direct where that cash will go. I suggest you speak about that with your Super administrator.
    Radish
    25th May 2018
    4:42pm
    I thought superannuation was to be used to live on in retirement not saved as an inheritance.
    Peterrj
    25th May 2018
    8:14pm
    Yes, and perhaps a much bigger yes in the future. Some plan to reuse your residual unused Super when you die to be paid into general a bucket to be redistributed to others who don’t have Super saving! D’oh! Can’t happen, want’a bet? If Super is not an inheritance scheme then there is rhe resulting answer!!!
    sunnyOz
    25th May 2018
    11:37pm
    Agree - Radish. Absolutely loath it when I hear people say they are accumulating wealth to leave as an inheritance. I firmly believe that in the future the govt will control super and dole it out to people to avoid paying a pension. So that people who HAVE super will be supporting those people who did NOT have any super to add to the pot.
    It will happen - I just hope and pray I won't be around to see that.
    Anonymous
    26th May 2018
    12:16pm
    What is wrong with accumulating wealth to leave as an inheritance, if you acquired that wealth through extra work or personal sacrifice in order to benefit heirs. If that was your choice, what is wrong with it? I get angry when people suggest that someone is entitled to gamble and party and holiday and then claim a government pension, but someone who specifically went without those pleasures to leave money to their kids has no right to make that choice. Remember, many of today's retirees had very little or no employer-funded super, so savings - even some in super in some cases - may be entirely voluntary contributions resulting from hard work and frugal living. If the choice to live frugally was made consciously wanting to leave money to heirs, why should people not have that right? Why are spendthrifts rewarded and savers punished?


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