Where does your superannuation go when you pass away?

Superannuation is often one of our biggest assets, outside of property, shares and bank account balances. Whether you have a healthy superannuation balance or not, you’ll still want to ensure that the cash reaches the right people after you die so they can be looked after.

Contrary to what many people believe, superannuation generally does not form part of your estate and you cannot leave it to your loved ones in your will.  Wills tend to only cover assets that you own like property, investments, savings, cars, and other personal items.

How super is distributed after death

The only time superannuation can be dealt with by your will is if the trustee of your fund elects to pay it to your estate after your death.

Every superannuation fund has its own rules – many will allow you to complete a Binding Death Benefit nomination or Non-lapsing Death Benefit nomination that ensures the balance of your super and any life insurance is paid out to the person or persons you want to have it (your beneficiaries).

Your beneficiaries can include your spouse of partner, your children and anyone else who is financially dependent on you at the time of your death.

Many Binding Death Benefits lapse after just three years, so you need to make sure you keep these up-to-date otherwise the trustee of your super fund will be able to determine where the super is paid after you die.

Beware, though, that some super funds do not offer this and may only have non-binding nomination forms where they promise they will take your wishes into account, but ultimately may decide to pay other beneficiaries on your death. If this is of concern to you, you should do your due diligence and look at changing funds.

If you have not made a nomination, the trustee of your fund will either pay the money to your estate or exercise discretion about where the money should go. Just like when you die without a will, where the money ends up might be contrary to your wishes.

Will your loved ones have to pay tax on any inherited super?

Depending on how your superannuation is paid after your death, there are different tax treatments that may apply.

Taxation will also depend on whether or not your beneficiaries are considered to be “tax dependents” – this includes any current or former spouses or defacto partners, children who are under the age of 18 and anyone who is a financial dependent at the time of your death.

If your super is paid to a tax dependent directly or to a legal representative as a lump sum the benefits are not taxed.

If you leave your super to a non-tax dependent they will have to pay tax.

If super is paid as an income stream then taxation will depend on the age you are when you die, as well as the age of the beneficiary.