Superannuation beneficiaries need to be considered for when you die

This is because superannuation is not a personal asset like property or shares that you own in your own name.

It is held in trust for you by the trustee of your superannuation fund - when you die your superannuation is a trust asset not a personal asset.

Note the difference between a member benefit and a death benefit because they can have very different tax consequences.

The former is a payment made in the normal course of business to a living member of a superannuation fund.

A typical example is a payment to a member when they meet a condition of release such as retirement.

A benefit payment made upon the death of a super fund member is called a super death benefit.

Generally, the benefit can be paid to one or more of the person's dependents and/or to their legal personal representative (LPR), but the options and rules can be complicated.

This is why it's sensible to get good advice to make sure the death benefit payment, and any proceeds from insurance inside super, go to your intended beneficiaries.

It's even more complex for people with larger superannuation balances. For example, the transfer balance cap limits the amount that can be converted to the retirement phase of super and a death benefit can only be retained in the superannuation environment if paid as a retirement income stream. In some cases the only strategies available are to commute part of the benefit back to the accumulation phase or simply cash it out.

Case study: Jack and Jill are seniors and have a total super balance of $3.1 million split $2.2 million to Jack and $900,000 to Jill.

Jack has $1.8 million in pension mode and the balance in accumulation mode.

Jill is 100 per cent in pension mode. Both of their pensions are "reversionary" which means they will continue to each other if one of them dies.

Jill only started her pension on July 1, 2023, so her "transfer balance cap" (the cumulative amount she's allowed to turn into a pension over her lifetime) is $1.9 million.

Her pension was worth $880,000 when it first started and so she's already used up this much of her cap and has $1,020,000 left.

If she inherits Jack's pension of $1.8 million and doesn't make any changes she will go over her cap by $920,000 (her existing $880,000 plus $1.8 million is $2.82 million).

Since that's more than she's allowed, the trustee will need to pay the excess ($920,000) plus all of Jack's accumulation account directly to Jill, or another beneficiary or Jack's estate.

But Jill can make some changes to her own pension to allow her to keep a bit more of Jack's balance in super. She has 12 months to do this.

As long as she's already made enough pension payments this year to meet the rules, she can "fully commute" her own pension (switch it off and put it back into her accumulation account).

This will give her back another $900,000 (her current pension balance) of her transfer balance cap. It will mean she can leave almost all of Jack's pension intact (the amounts checked against her transfer balance cap will look like this: $880,000 + $1.8m - $900,000, ie $1,920,000).

That means the trustee will only need to take the excess of $20,000 plus Jack's accumulation account ($400,000) out of super.

It's a complex issue and alternatives such as testamentary trusts and investment options outside super may also need to be considered.

Advice is essential.