Superannuation Death Benefits and Estate Planning: Ensuring Your Super Protects Your Loved Ones

Your superannuation is likely one of your largest assets, potentially worth hundreds of thousands of dollars by the time you reach retirement age. Yet many Australians have not considered what happens to this money if they pass away, or have outdated arrangements that may not reflect their current wishes. This guide explains how superannuation death benefits work, the different ways to direct where your super goes, and the tax implications that can significantly affect what your beneficiaries ultimately receive.

Understanding Superannuation Death Benefits

When a super fund member dies, their superannuation balance becomes a death benefit that must be paid out to one or more beneficiaries. Unlike other assets, superannuation does not automatically form part of your estate and is not distributed according to your will unless specific arrangements are in place. Instead, the trustee of your super fund has discretion over who receives your death benefit unless you have made a valid binding nomination directing the payment.

Eligible beneficiaries under superannuation law are limited to specific categories of people. These include your spouse or de facto partner, your children of any age, anyone in an interdependency relationship with you, and anyone financially dependent on you at the time of your death. If you have no eligible dependants, the death benefit must be paid to your legal personal representative, meaning it flows to your estate and is then distributed according to your will. This distinction between superannuation dependants and estate beneficiaries is crucial for planning purposes.

Types of Death Benefit Nominations

There are several types of nominations you can make to direct where your super death benefit goes. A non-binding or preferred beneficiary nomination indicates your wishes but does not legally require the trustee to follow them. The trustee will consider your nomination but retains discretion to pay the benefit to eligible dependants as they see fit. This type of nomination never expires, but it provides the least certainty about outcomes.

A binding death benefit nomination legally requires the trustee to pay your death benefit according to your directions, provided the nomination is valid and the nominated beneficiaries are eligible dependants or your legal personal representative. Most binding nominations expire after three years and must be renewed, though some super funds now offer non-lapsing binding nominations that remain in place indefinitely until you change them. Check your fund's rules to understand what type of binding nomination is available and whether renewal is required. Given the importance of this nomination, reviewing it regularly and whenever significant life changes occur is essential.

Reversionary Pension Nominations

If you are receiving a pension from your super fund, such as an account-based pension in retirement, you have an additional option called a reversionary pension nomination. This allows you to nominate a dependant, typically your spouse, to automatically continue receiving the pension payments upon your death. The pension simply continues in the name of your surviving spouse without the balance needing to be paid out as a lump sum.

Reversionary pensions offer several advantages. The transition is seamless, with no interruption to income for the surviving spouse. There may also be tax benefits, as a reversionary pension can continue to be paid tax-free to a spouse aged 60 or over, even if the taxable component would have attracted tax if paid as a lump sum to a non-dependant. However, reversionary nominations must be made when the pension commences; you cannot add a reversionary beneficiary later. Use our superannuation calculator to project your pension balance and understand what might be available as a death benefit.

Tax Implications of Death Benefits

The tax treatment of superannuation death benefits depends on who receives them and how they are paid. Death benefits paid to tax dependants, which include spouses, children under 18, and financial dependants, are completely tax-free regardless of whether the payment is a lump sum or pension. This is a significant advantage and one reason why directing benefits to a spouse is often preferred.

However, death benefits paid to non-dependants, such as adult children who are not financially dependent, face different treatment. The taxable component of a lump sum death benefit is taxed at 15 per cent plus the Medicare levy when paid to a non-dependant. If the death benefit includes an untaxed component, typically arising from certain public sector or older defined benefit funds, this component is taxed at 30 per cent plus Medicare levy for non-dependants. These tax implications can result in substantial amounts going to the government rather than your intended beneficiaries, making strategic planning particularly important for those with adult independent children.

Coordinating Super with Your Overall Estate Plan

Because superannuation operates separately from your will, coordinating the two is essential for an effective estate plan. Many people assume their will covers everything, but if you have not made a valid nomination for your super, the trustee's discretion may result in outcomes different from your intentions. Conversely, an outdated binding nomination might direct your super to an ex-spouse or other person you no longer wish to benefit.

Consider how your superannuation death benefit fits with other assets in your estate. If you want to treat your children equally but only your spouse is a tax dependant for super purposes, you might direct super to your spouse tax-free while using other assets to provide for your children. Alternatively, you might nominate your legal personal representative so that super flows to your estate and can be distributed according to your will, accepting any applicable tax on payments to non-dependants in exchange for greater flexibility and control through the estate.

Reviewing and Updating Your Nominations

Life changes such as marriage, divorce, birth of children, and death of previously nominated beneficiaries all warrant a review of your superannuation death benefit arrangements. Many Australians have nominations made years or even decades ago that no longer reflect their circumstances. A nomination made in favour of a former spouse remains valid after divorce unless you actively change it, potentially resulting in your super going to someone you no longer intend to benefit.

At minimum, review your nominations whenever a significant life event occurs and as part of regular financial reviews. Check with your super fund what type of nomination you currently have in place, when it was made, and whether it requires renewal. If you cannot locate a nomination or are unsure of its validity, consider making a new one to ensure your wishes are clearly documented. Given that super balances often grow substantially over time, the importance of having correct nominations in place increases as your balance grows.

Conclusion

Superannuation death benefits represent a significant component of most Australians' wealth, yet they receive far less attention than other estate planning matters. Taking the time to understand how death benefits work, making valid and appropriate nominations, and coordinating your super with your overall estate plan ensures that your hard-earned retirement savings benefit the people you intend rather than being distributed according to trustee discretion or inefficiently taxed.

If you have not reviewed your superannuation death benefit arrangements recently, now is the time to do so. Contact your super fund to confirm your current nominations, consider whether they still reflect your wishes, and seek professional advice if your situation is complex. Proper planning in this area provides peace of mind that your loved ones will be provided for according to your intentions.