What Happens to Your Superannuation When You Die?

Superannuation, or “super,” is Australia’s compulsory retirement savings system. Unlike traditional inheritance, superannuation funds do not automatically become part of a deceased person’s estate. Instead, specific superannuation laws and fund rules govern these benefits. Understanding this process helps individuals ensure their financial wishes are met and aids beneficiaries in claiming funds.

Identifying Beneficiaries

Superannuation death benefits are paid based on legal definitions and nomination types. Funds can pay benefits to the deceased’s “dependants” or their “legal personal representative” (LPR), typically the executor or administrator of their estate. A dependant includes a spouse (including de facto), any child, someone in an interdependent relationship, or anyone financially dependent on the deceased.

Individuals can nominate beneficiaries through a “binding death benefit nomination” (BDBN). A valid BDBN legally obliges the fund trustee to pay benefits as nominated. To be valid, it must be written, signed by the member, and witnessed by two people over 18 who are not beneficiaries. BDBNs often expire after three years, requiring regular renewal.

If no valid binding nomination exists, a “non-binding death benefit nomination” can guide the trustee, but is not compulsory. Otherwise, the trustee uses discretion to distribute benefits among eligible dependants or the LPR. The trustee must act fairly, considering beneficiaries’ financial needs and relationship.

The trustee identifies eligible beneficiaries based on the fund’s trust deed and superannuation law. Inquiries determine dependants’ existence and financial dependency. If no dependants are identified or deemed appropriate, benefits may go to the LPR for distribution via the will or intestacy laws.

Forms of Payment

Superannuation death benefits can be paid as a lump sum or an income stream. The payment method depends on beneficiary eligibility, fund rules, and preference. A lump sum is a single payment to the beneficiary or LPR, offering immediate access.

Eligible beneficiaries can also receive an income stream, or pension. This provides regular payments from the fund. Income streams are generally restricted to dependants like a spouse, a child under 18, a financially dependent child aged 18-25, or a child with a permanent disability. For children, payments usually cease at age 25 unless they have a permanent disability.

The decision between a lump sum and an income stream has implications for financial management and taxation. Super funds have specific rules regarding payment forms. Beneficiaries should consult the fund to understand available options and conditions.

Taxation of Death Benefits

Taxation of superannuation death benefits in Australia depends on the recipient and the superannuation balance components. Benefits paid to a “tax dependant” are generally tax-free. A tax dependant includes a spouse (including de facto), a child under 18, a financial dependant, or someone in an interdependent relationship.

Different tax rules apply for a “non-tax dependant.” This typically refers to an adult child not financially dependent on the deceased. Superannuation balances have two components: “tax-free” and “taxable.” The tax-free component, from after-tax income, is not taxed regardless of recipient.

The taxable component, from pre-tax income and investment earnings, is taxed when paid to a non-tax dependant. For a lump sum to a non-tax dependant, the taxable component is taxed at 15% plus a 2% Medicare levy, totaling 17%. An untaxed element within the taxable component may incur a higher rate of 30% plus the Medicare levy (32%).

If paid as an income stream to a non-tax dependant (less common), the taxable component is taxed at the individual’s marginal rate, with a 15% tax offset. The Medicare levy also applies. Tax treatment can be complex, impacting the net amount received.

Claiming Superannuation Death Benefits

Claiming superannuation death benefits begins with promptly notifying the deceased’s super fund. This involves informing the fund(s) of the member’s passing, including basic details and date of death.

The fund will request documentation to process the claim. This includes a certified death certificate from the Registry of Births, Deaths and Marriages. Beneficiaries must provide proof of identity and relationship. If claimed by the LPR, a certified Grant of Probate or Letters of Administration, and a certified Will, may be required.

The fund provides a death benefit claim form for accurate completion. The form requests details about the deceased, claimant, and payment method. Ensure all sections are complete, using information on eligibility and payment forms. Submit the completed form and supporting documents to the fund, via mail or online portal.

Upon receiving the claim, the trustee assesses it. This involves verifying claimant eligibility, reviewing nominations, and determining payout according to the fund’s trust deed and superannuation law. Assessment time varies, but funds typically process claims within weeks to months, depending on complexity. Once approved, the fund processes payment as a lump sum or income stream.