As Benjamin Franklin said back in the 18th century: “Nothing can be said to be certain, except death and taxes”.
It’s inevitable. Now let’s talk about what happens to your super after death.
It can be a source of confusion amongst family members, as there is often the misconception that a person’s will directs where the super will go. This is not the case.
So what does happen to it?
Super after death: who decides where it goes?
Superannuation is not covered by a will and doesn’t always go to the estate, automatically. You still get to decide where it goes – but ultimately your super will go to your nominated beneficiary.
This is the person that you officially nominate to receive your super after death.
How do you nominate your beneficiary?
You can make a binding death nomination with your super fund. Here you nominate a dependant or dependants to receive your super after death. Alternatively, you can nominate the estate to distribute your super in accordance with your will.
The dependants under superannuation laws could be:
- Your current spouse or partner
- Children (including step children or adopted children)
- A person with whom you were in an interdependency relationship (usually living together and providing financial, domestic, and personal support to each other)
When you start a pension with your super (upon achieving a preservation age of at least 55 years and meeting a condition of release), you can also nominate a reversionary beneficiary, who will continue to receive your pension after your death.
If there is no binding death nomination or reversionary pension in place, your superannuation death benefit will go to your estate.
Super after death: How is it paid?
Dependants can get the super in a lump sum or as an income stream (pension). The income stream option only applies if you had this in place before death.
All other beneficiaries (non-dependant) can only receive your super death benefit via the estate and as a lump sum after your death.
However, only tax law dependants will get your super tax-free. This includes a current spouse or partner, an ex-spouse, children under the age of 18, a person financially dependent on you, or a person you were in an interdependency relationship with.
Super after death: How much tax is paid?
If, after your death, your super benefit is paid to a non-dependent beneficiary from tax law perspective (for instance, children over 18, who are not dependant) the tax-free component will be received tax free but the taxable component will be taxed.
Now, what are the tax-free and taxable components?
You can find a split of your superannuation balance components in your member statements. However, if you have only ever had employer contributions going into your super, all these contributions will form a taxable component. Only so-called “after-tax contributions” where you didn’t claim a tax deduction, would form a tax free component.
The taxable component of your superannuation, paid to a non-dependant beneficiary, will be taxed at their own marginal rate or 17 percent – whichever is lower.
If you would like to find out more about what will happen to your super after death, please email us at: enquiry@smsfconsulting.com.au or call Natalia 0432 366 690.