Who will inherit your super?
The issue of making sure your super goes to the person you intend it to when you die was put in the spotlight in 2021 with the case of the late Ashleigh Petrie.
The trustees of her super fund, Rest, initially determined her reportedly $180,000 superannuation and life insurance benefit should go to her partner on her death.
It was a controversial story due to the pair's age difference (she was 23, he was 68) and brevity of their relationship.
Who is entitled to your superannuation?
But it has important lessons about how the law works in relation to who is entitled to someone's superannuation on their death.
"This was an unusual and complicated case in which the super laws were applied correctly, but perhaps not justly or fairly, given the circumstances of the case, and hence it was disputed," says Andrew Yee, director of superannuation at financial services firm HLB Mann Judd.
"The deceased left her super benefits to her mother, but it appears it was not a binding nomination and it was overridden by discretion of the trustee of the fund, who paid her super benefits to her de facto partner at the time of death.
"This is because the trustee considered the nomination invalid, as a parent of the deceased is not considered a dependent under the super laws. This is unless it can be proven that the parent is financially dependent on the child," he adds.
How often should you update your super beneficiary?
The case highlighted the importance of understanding to whom you can direct your super death benefit.
It also brought into focus the importance of ensuring you regularly review and update your wishes about who you want your super to go to when you die. The best way to do this is through a binding death nomination.
"As a guide, it is sensible to review your super nominations every few years because, for some super funds, your nomination can lapse after three years," says Tony Davison, a wealth-management partner at financial advice firm People & Partners.
He says it's critical to ensure you have a valid and legally drafted will in place that reflects what you want to happen with your affairs.
"This is vital because superannuation does not form part of your estate versus, say, your bank account, shares, property and other assets. So, the binding nomination ensures your direction to pay a death benefit payment to your intended beneficiary actually occurs," says Davison.
What is the difference between binding and non-binding?
The primary legislation that governs superannuation in Australia is the Superannuation Industry (Supervision) Act 1993, which super experts refer to simply as 'the act' or the 'SIS act',
and the Superannuation Industry (Supervision) Regulations 1994, known as the SIS regulations.
The key concepts under these rules determine what happens to your super upon your death. Appreciating the difference between a binding and non-binding nomination is the first concept to grasp.
A binding nomination is a legally binding instruction to the fund trustee regarding who should receive your superannuation benefits on your passing.
"A binding death nomination requires your super fund trustees to pay your super to a nominated beneficiary in the event of your death. That is, unless it would be unlawful for the superannuation fund to make that payment," says Davison.
An example would be that the recipient is not a legally recognised beneficiary under law, for instance, a friend.
A non-binding nomination, on the other hand, is akin to a letter of wishes where you guide the super fund as to what you want to happen with your super when you die. But it is not required to follow your wishes, although the trustees can take them into account.
"You can think of a non-binding nomination as a suggestion to the trustee," says Nathan McCullum, founder of financial advice firm McCullum Advisory.
"While it provides guidance on your preferences, the trustee ultimately has the discretion to make the final decision on what to do with your super. Many people opt for binding nominations to ensure their wishes are carried out precisely."
A third alternative is no nomination at all. "In this case, your super fund has discretion to whom to pay the superannuation death benefit. This is akin to dying without a will, which leaves others with difficult decisions and potentially opens the way to legal disputes among the family," says Davison.
When you make your nomination, it needs to be in writing and you need to ensure two witnesses sign the document.
What is a reversionary nomination?
This is generally associated with income streams such as defined benefits (see breakout, right) and nominates the person who will receive your income stream after you die.
"A reversionary nomination is a unique type of binding nomination," says McCullum. "It allows you to nominate a specific dependent, who is usually a spouse, to automatically inherit your superannuation benefits on your passing. This option provides a seamless transfer of funds to your chosen beneficiary without going through the estate."
Given its value, it's incredibly important to properly manage a reversionary nomination where a person is receiving a Commonwealth-defined benefit, for example from a career serving in the military.
"Generally, a proportion of that pension payment will continue to be paid to a nominated beneficiary after their death," says Davison.
Who is considered a dependent?
An important distinction is that under law, you can only leave your super to a person who is considered to be a dependent.
In the context of superannuation, a dependent is someone who relies on you financially.
This can include spouses, children or anyone else who relies on your financial support to maintain their standard of living. It's crucial to check the specific definitions and rules outlined by your superannuation fund if you're nominating a dependent to receive your super on your death.
"If a nominated beneficiary doesn't fit one of these categories, they can only receive the superannuation death benefit through the deceased person's estate. The deceased's binding death nomination needs to direct the death benefit payment to the estate and the deceased person must have a valid will," says Tony Davison, from People & Partners.
Can you leave your super to your spouse?
Most people leave their super to their spouse or partner and super benefits are often automatically paid to your spouse or partner if a valid binding or reversionary nomination is in place.
Even if you don't have dependents, a binding death nomination is still vital to ensure your super is paid to your estate, from which the super and your other assets can be transferred to your nominated beneficiaries.
"You can still leave your superannuation benefits to someone else, such as your parents or siblings. But this might involve additional complexities and tax implications. Talk to a financial adviser or estate planner to explore your options and ensure your wishes will be carried out," says Nathan McCullum, from McCullum Advisory.
What does defined benefit mean?
In Australian superannuation law, a defined benefit superannuation plan is a type of retirement savings plan through which the benefits a member receives on retirement are predetermined, based on a specific formula or set of rules.
This is in contrast to defined contribution superannuation plans, where the final benefit depends on how much money has been contributed to the fund and how well those contributions have been invested.
Key characteristics of defined benefit superannuation plans include:
- Formula-based benefits: the benefits are typically calculated using a formula that takes into account factors such as a member's salary, years of service and a set accrual rate. This formula determines the amount of retirement income or lump-sum payment a member is entitled to receive.
- Employer responsibility: employers are generally responsible for funding the defined benefits and ensuring there are sufficient assets in the fund to meet these obligations. This means employers may need to make additional contributions if the fund's assets are insufficient to cover the promised benefits.
- Guaranteed retirement income: members of defined benefit funds have a level of certainty about the retirement income they will receive, as it is often guaranteed or defined in the fund's governing documents.
- Investment risk: the investment risk in a defined benefit plan is primarily borne by the employer or the fund itself, rather than the individual members. If the fund's investments underperform, the employer may need to make higher contributions to meet the defined benefit obligations.
Defined benefit superannuation plans have become less common in Australia in recent years, with many employers favouring defined contribution plans due to their predictability and reduced financial risk. Some public sector and government employees may still be members of defined benefit funds.
The Australian government has implemented various reforms and regulations to ensure the financial sustainability of defined benefit funds and to protect the retirement benefits of members.
These include rules for the funding of defined benefit obligations and governance standards for trustees of such funds.
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