Question 1

Hi Craig, thanks for your great column. 

I am 74. Can you explain the way my super is handled when I die? AustralianSuper gives me a choice of setting up a reversionary death benefit or a binding death benefit for my spouse. 

I am not totally clear about what rights my spouse would have to deal with the money under the reversionary system – they told me she would be able to take a pension or lump sums as she wished. She also has her own super fund. I am also concerned about the tax implications for either course of action.

Can you explain the pros and cons of each option? I assume that my super will go to my estate if my spouse dies first and it will not be taxed. 

Thanks

If you made your wife a reversionary or binding death benefit nomination, the proceeds would be paid to her tax free in either scenario.

In both scenarios, the trustee is bound by your nomination – unless your wife pre-deceases you, in which case your nomination becomes invalid and it’s therefore at trustee discretion.

If your wife does die first, you should update your nomination.

However, depending on the components of your superannuation fund and who received the benefit, there probably will be tax payable. 

The advantage of a reversionary pension is that it often “reverts” to the reversionary quite quickly. Therefore your payments will commence to your wife sooner than any other option.

Another advantage applies if you and your wife’s pension balances would exceed the transfer balance cap. With a reversionary pension, this does not count against your wife’s cap until 12 months from date of death. This would give her the time to organise her affairs.

Although it starts as a pension, your wife could make a part or full withdrawal at any time.

Binding nominations offer more flexibility. They can be used for both super and pension. If you want more flexibility, such as nominating more than one person, then a binding nomination is a good choice.

Most funds can pay proceeds as a lump sum or as a pension, but check that with your preferred fund.

Question 2

Dear Craig.

Do you feel conflicted when people with large super amounts ask about ways to minimise tax when you know they are not using their super in the way the scheme was intended and they are therefore contributing to the inequity in society and housing problems our generation face, who are also carrying the tax burden of the country?

An interesting question/comment. Strangely enough the purpose of super was legislated only in 2024. Here it is:

“To preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way.”

What you are getting at is that some wealthy individuals have more than enough to deliver a dignified retirement.

And that, super is being used as a tax break, as per the Grattan institute comments:

“Super has become a taxpayer-funded inheritance scheme for the rich.”

Again, is this “equitable” and “sustainable”? Lobby groups and politicians will continue to argue over this, but change is never easy to implement.

However, none of the above changes the fact that superannuation is a great retirement vehicle for most Australians and everyone should try to take advantage of the system to set themselves up for a nice retirement.

Question 3 

Hi, my wife and I are both 65 and retired. I have $1.2 million in a pension account and we live off this by drawing down the minimum amount monthly and then taking out lump sums as required.

Last year we took out an additional $30,000. My wife has $600,000 in an accumulation account that we don’t touch.

Having read one of your recent articles, I believe it would be better to move my wife’s super to a pension account also and start drawing down on that (at the minimum allowed), rather than taking out lump sums from my account. My reasoning is that my wife is paying tax on the earnings in her account but would not if it was moved to a pension account. Is my reasoning correct?

Apart from having to take out minimum amounts from both pension accounts, are there any disadvantages to having two pension accounts rather than living off one?

Hello,

Your reasoning is sound.

All earnings within the pension account are tax free and earnings within an accumulation account are taxed at 15 per cent.

All payments from pension or accumulation accounts are tax free once you are 60 or older.

As you are both 65, you would need to take payments of at least 5 per cent of your account balance each year (see table below), there is no maximum limit.

For yourself, this would mean $60,000, and $30,000 for your wife.

If you don’t need $90,000, then you could contribute some money back into a super account, or save it outside of super. If you don’t have a large investment balance outside of super and pay no income tax, then there is no negative tax impact.

As you can see from the table below the minimum payments increase as you get older. The reason for this is that the government doesn’t want the super system to be used as an estate planning structure, where you simply hold funds in a tax-free environment before leaving all the money to your beneficiaries.

Craig Sankey is a licensed financial adviser and head of Technical Services and Advice Enablement at Industry Fund Services.

Disclaimer: The responses provided are general in nature, and while they are prompted by the questions asked, they have been prepared without taking into consideration all your objectives, financial situation or needs.

Before relying on any of the information, please ensure that you consider the appropriateness of the information for your objectives, financial situation or needs. To the extent that it is permitted by law, no responsibility for errors or omissions is accepted by IFS and its representatives.