Many are often surprised to discover that superannuation does not constitute a part of their estate upon death, and it is not automatically governed by their Will. In the absence of a binding nomination specifying the desired recipient of your superannuation after your death, the trustee of your super fund retains the authority to distribute your balance and any associated insurance benefits entirely at their discretion.
Why you should nominate a beneficiary
Determining the recipient of your superannuation is a crucial decision. Unlike other assets, your superannuation and any associated insurance benefits are not considered part of your estate. This distinction arises because your superannuation is legally treated as being held in trust until you become eligible to access it. Consequently, selecting a beneficiary at this stage can alleviate the burden on your loved ones in the event of unforeseen circumstances.
In the absence of a nominated beneficiary, your superannuation fund will adhere to relevant laws to determine the recipient of your accumulated balance. This may involve one or more of your dependents or your legal personal representative. Proactively designating a beneficiary can bring clarity to your intentions regarding the distribution of your superannuation in the event of your demise, potentially preventing disputes among your loved ones.
Who you can nominate as your beneficiary
Potential beneficiaries may include:
- Your spouse or de facto partner
- One or more of your children
- Interdependents, defined as individuals sharing a close personal relationship with you, residing together, and mutually providing financial and domestic support, as well as personal care for each other
- Other financial dependents who rely on you for financial support
- Your legal personal representative
If you’re not sure who to nominate as your beneficiary
If you find yourself uncertain about whom to designate as your beneficiary, one option is to nominate your legal personal representative.
Subsequently, you can use your will to outline your preferences for the distribution of your superannuation proceeds.
For instance, if you desire to nominate a parent or a financially independent sibling, you can make a binding nomination in favor of your legal personal representative. Then, you can provide specific instructions in your will regarding the allocation of your superannuation assets.
It’s important to note that, for tax purposes, a legal personal representative is not classified as a financial dependent. Consequently, in such situations, taxes will be applicable to your superannuation balance.
Types of nominations
Most super fund, let you nominate a beneficiary as either a:
- binding nomination, or
- non-binding nomination, or
Binding nomination
By making a binding nomination, your superannuation fund is under legal obligation to disburse your account balance to the specified beneficiary, provided that your nomination is both valid and active at the time of your demise. Typically, this disbursement is a lump sum, although in certain instances, it may be arranged as a recurring income stream.
The validity of binding nominations is restricted to:
- A maximum of 3 years before your passing, and
- All individuals nominated must remain eligible at the time of your death.
Hence, it is imperative to regularly review and renew binding nominations to ensure they align with your current circumstances and preferences.
Nominating children under a binding nomination
Should you designate a child below the age of 18 as your beneficiary, your superannuation balance might be directed into a trust account, overseen by a Trustee who will manage the funds until the child reaches the age of 18.
For individuals aged between 18 and 25, recognized as your financial dependents, the option exists to receive your super balance as periodic income payments. In the event they are your designated beneficiaries, any remaining balance will be disbursed to them in its entirety upon reaching the age of 25.
However, if your child is enduring a permanent disability, they may continue to receive regular payments until the funds are depleted, irrespective of their age.
Non-binding nomination
By opting for a non-binding nomination, you communicate to your fund the preferred recipient of your super balance, yet this preference is not legally binding. Consequently, while your fund considers your expressed wishes, the final decision rests on applicable legal guidelines.
The needs of your dependents at the time of your demise may also influence the fund’s determination.
In certain circumstances, the outcome may deviate from your non-binding nomination, but it will consistently align with legal requirements. Typically, the account balance is disbursed as a lump sum payment.
Beneficiary payments and tax
The regulations concerning the taxation of beneficiary payments can be intricate, contingent on your relationship with the beneficiary and the type of nomination enacted.
For instance:
- If the beneficiary qualifies as a financial dependent, they may be deemed a dependent and receive the benefit free from tax.
- If the beneficiary is not categorized as a financial dependent, such as a financially independent adult child, they might be required to pay tax on a portion of the benefit.
Additionally, the tax you incur may be influenced by whether you receive super payments as a lump sum or as an income stream.
