Guide to Superannuation Death Benefits
Superannuation death benefits are an essential part of estate planning, ensuring that the wealth accumulated in super is distributed effectively to beneficiaries. Understanding who can receive a super death benefit, the payment options available, and the tax implications is crucial for making informed decisions.
Who Can Receive a Super Death Benefit?
A super death benefit can be paid to:
Dependants under Superannuation Law (SIS Dependants):
Spouse (including de facto partners).
Child of any age.
Financial dependants.
Individuals in an interdependency relationship with the deceased.
Legal Personal Representative (LPR) of the estate.
Tax Dependants:
Former spouses.
Children under 18 (or older if financially dependent or in an interdependency relationship).
Individuals meeting specific tax dependency rules.
Payment Options for Death Benefits
Lump Sum Payments:
Paid directly to the beneficiary or the estate.
Benefits distributed to the estate are governed by the Will or intestacy laws.
Death Benefit Income Streams:
Available to:
Spouses.
Children under 18 (or under 25 if financially dependent).
Disabled children of any age.
Financial dependants or individuals in interdependency relationships.
Subject to the Transfer Balance Cap (TBC).
Rollover to Another Super Fund:
Death benefits can be rolled over to another fund to commence a new pension. However, the amount must be paid as a pension or lump sum, not retained in accumulation.
Taxation of Super Death Benefits
The tax treatment of death benefits depends on:
The Relationship Between the Deceased and the Beneficiary:
Lump sums paid to tax dependants are tax-free.
Non-tax dependants are taxed at 15% (plus Medicare levy) on the taxed element and 30% on the untaxed element.
The Form of Payment:
Lump sums: The tax-free component is always tax-free, while the taxable component may be taxed based on the recipient’s dependency status.
Income streams: The tax treatment depends on the ages of the deceased and the recipient at the time of payment.
Transfer Balance Cap:
Death benefit pensions count towards the beneficiary’s TBC, limiting the amount that can remain in retirement phase.
Transfer Balance Cap and Death Benefits
The TBC applies to pensions received as death benefits, with different considerations for:
Reversionary Pensions:
Automatically continue to the nominated beneficiary.
The value at the time of death is credited to the recipient’s TBC 12 months after death, allowing time for planning.
Non-Reversionary Pensions:
Commence upon the trustee’s decision to pay a pension to the beneficiary.
The value at the commencement date is credited to the TBC.
Child Death Benefit Pensions
Eligible for children under 18, financially dependent children under 25, and disabled children of any age.
Must be commuted when the child reaches age 25 (unless disabled).
Subject to the child’s modified TBC increment, calculated based on the parent’s retirement phase balances.
Planning Opportunities
Testamentary Trusts:
Direct super death benefits to the estate to establish a testamentary trust.
Ensure trust beneficiaries are tax dependants to minimize tax liabilities.
Reversionary Pension Nominations:
Offer faster processing and allow more time for TBC planning.
Recontribution Strategies:
Withdraw and recontribute super to convert taxable components into tax-free components, reducing tax liabilities for non-tax dependants.
