The superannuation industry is heading for a reckoning, and the latest uproar over death benefits is just one more chapter in a long-running saga.
In October 2024, ASIC Commissioner Simone Constant slammed the industry for poor service, weak trustee expertise, and a failure to reform. Her message was loud and clear – but, as usual, it fell on deaf ears.
If history is any guide, we know what happens next: apologies, vague promises, and token changes. Nothing near the overhaul that’s needed.
We all need to protect ourselves from the indifference of big institutions. Today, we’ll look at how.
First, understand two key terms: member benefit and death benefit. A member benefit is a payment to a living member – it is tax-free. A death benefit is paid after death – and if it goes to a non-dependent, it may attract a death tax of up to 17%.
Obviously, it’s better to receive a member benefit: you get the money immediately and sidestep the death tax. So when is the right time to start pulling money out of super?
Let’s think about super. Throughout your working life, your fund grows steadily, boosted by contributions, employer payments, and investment earnings, all taxed at just 15%. When you retire and start a pension, the fund becomes tax-free, and you can withdraw as needed. Many retirees leave their money in super because it’s simple: investments are managed, and regular drawdowns can be arranged. But if the money is still there when they die, there can be drawbacks: delays, administrative hassles, and possibly a death tax.
I’ve always advised keeping at least three years’ planned expenditure in cash. Make sure your buffer account is available to both members of a couple and to your attorney. It provides peace of mind during market downturns, so you’re never forced to sell when prices are down. You might hold, say, $150,000 in a bank account and top it up each year from super. It’s also a safety net if one partner dies and there are delays in releasing tax-free super. And when a single member dies, funds are there for the estate and attorney to cover costs during probate and delays.
This kind of planning means you won’t be caught short at the worst time. It protects you from super fund inertia, keeps money accessible, and gives investments time to recover.
A key step in estate planning is to appoint a trustworthy enduring power of attorney. To avoid the death tax, you can instruct them to withdraw your super, tax-free, when death is near – if your power of attorney allows it. Timing is everything.
A friend of mine battled Catholic Super and their trustee, Mercer. Her grandmother, terminally ill, had six months to live. They notified the fund to withdraw the super as a member benefit. But delays and mix-ups meant the payment wasn’t made before her death. Despite appeals, the death tax applied.
So don’t leave it to the last minute. If your intention is to receive your super as a member benefit, notify your fund well in advance. Otherwise, your estate – and your loved ones – could end up paying the price.
That strategy of withdrawing super before death works well, but it’s only relevant if you’re in the final stages of life. For the average retiree, a still more practical approach is to make sure you’ve got a serious financial buffer in place.
About the author: Noel Whittaker, AM, is the author of Wills, Death & Taxes Made Simple and numerous other books on personal finance. An international bestselling author, finance and investment expert, radio broadcaster, newspaper columnist and public speaker, Noel Whittaker is one of the world’s foremost authorities on personal finance. Connect via Twitter or email ([email protected]). You can shop his personal finance books here.
Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. Always seek professional advice that takes into account your personal circumstances before making any financial decisions. The views expressed in this publication are those of the author.
