For most people, deciding what should be done with their assets and possessions after they die is not something they like to consider. Although it is a bit morbid, this decision is extremely important to ensure your carefully earned assets are distributed according to your wishes. While most people bequest their house, household contents, jewellery, collectibles, cars, boats, and things of that nature in their will, their superannuation and pension balances are often forgotten. This is where superannuation death benefit nominations become extremely important.

What steps can you take?

Superannuation fund trustees allow members to make what is called a ‘death benefit nomination’ for their account balances. This nomination allows members to dictate to the superannuation fund trustees where their superannuation benefits should be paid if the member passes away. However, it should be noted that there are different types of death benefit nominations and not all superannuation providers offer all options. The governing rules of superannuation funds define whether they can allow certain types of death benefit nominations to be made.

There are two types of death benefit nominations: binding and non-binding. Both are only activated on the superannuation members’ death and are usually paid in lump sums to the beneficiaries.

Binding death benefit nominations

A binding death benefit nomination binds the superannuation trustee to paying the members’ superannuation benefits as directed by the member before their death. However, binding nominations can still be overruled by the superannuation fund trustee in some cases.

Binding nominations expire every 3 years. While having to provide a new nomination every 3 years may seem like a hassle, consider how much your life may change in 3 years by births, deaths, separation, divorce or marriage etc. When this is taken into account, updating your death benefit nomination every 3 years seems like a prudent measure.

Non-binding death benefit nominations

A non-binding death benefit nomination is similar to a binding death benefit nomination, except the superannuation trustee is not bound to pay your superannuation benefits to your nominated beneficiaries. You are able to nominate who you would prefer your benefits to be paid to, however, this is used as a guide and the ultimate decision remains with the superannuation trustee. The trustee must still pay the benefits to a dependent or your legal personal representative however.

Non-lapsing binding death benefit nominations

These are much the same as binding death benefit nominations but with one crucial difference – this nomination remains in place until you revoke it, change it or make a new nomination. This may present a trap if you nominated your beneficiaries when you first opened your superannuation account 10 years ago but have not checked or updated your nomination since then.

If you were to pass away before updating your nomination, your superannuation benefits might not be paid the way you intended. It’s worth checking your nomination often to ensure your beneficiaries are up to date. This information is usually recorded on the annual statement provided by your superannuation fund at the end of every financial year.

Reversionary nominations

Reversionary nominations are another type of death benefit nomination specifically in relation to a pension or annuity. It simply means that on your death, the regular payment amount from your pension or annuity would continue to be paid to an individual nominated by you.

If the rules of the superannuation fund allow it, you could nominate your beneficiaries via a binding or non-binding death benefit nomination instead of a reversionary nomination, however, the benefit would be paid as a lump sum, not a regular income stream. It’s also worth noting that not all beneficiaries can receive a superannuation death benefit as an income stream.

Self-managed superannuation funds

Self-managed superannuation funds are able to make binding death benefit nominations, however, they are bound by rules and limitations according to the ATO Self-Managed Superannuation Funds Determination 2008/3.

What happens if no binding nomination is in place?

If a member has no binding nomination in place or has let their nomination lapse, the superannuation fund trustee may consider any valid non-binding death benefit nominations the member made before their death when deciding where to pay the member’s superannuation benefits. The trustee will also make enquiries about the member’s will and family situation before paying the benefits, however, the superannuation fund trustee must pay the death benefits in accordance with the superannuation fund’s trust deed rules as well as the governing rules of the superannuation fund, superannuation law, and common law. 

Who can be a beneficiary?

Your beneficiaries/beneficiary must be a dependent of you or they must be your legal personal representative (LPR). This is usually the executor of your will or your estate administrator. You are able to nominate multiple beneficiaries with different allocations but the total allocation must equal 100%. You are able to allocate part of your benefits to your LPR with the remaining portion going to a beneficiary.

The SIS Act 1993 classifies a dependent as one of the following:

• Your spouse or de-facto spouse
• Children, including adopted, ex-nuptial and stepchildren of any age
• A person who was financially dependent and reliant on you at your death
• An individual who has a close personal relationship with you. This person must live with you and one or both of you must provide the other with financial support, domestic support, and personal care. They do not have to be related to you.

Making a valid nomination

For a death benefit nomination to be valid, all of the following criteria must be met:

• Nomination is made in writing by the member
• Beneficiary is a dependent according to the SIS Act 1993 or is the LPR of the member
• Allocations are clear and all required details have been provided
• Nomination has been signed and dated by the member in the presence of 2 witnesses over the age of 18
• Nomination must be reviewed at least every 3 years

Checking that the death benefit nominations on your superannuation funds are up to date will ensure that your carefully accumulated superannuation benefits are paid to the right people after you are gone.

For help on nominating your beneficiaries or making a death benefit nomination, contact Quill Group today. Quill Group also has in-house estate planning lawyers based on the Gold Coast through our subsidiary company Intello Legal.

Other articles related to binding death benefit nominations

The following are other articles related to superannuation estate planning which may be of interest:

• The importance of estate planning
• Is your SMSF estate plan up to speed?
• Wills and SMSF estate planning (Intello)

With the Government abandoning its policy to introduce a $500,000 lifetime cap for non-concessional contributions are you clear on what non-concessional contributions you can make to superannuation now?

Non-concessional contributions are contributions that are made to super from after-tax income or savings.

Instead of going forward with its proposed $500,000 lifetime cap on after-tax contributions, (with a retrospective counting of the last ten years) the Government has decided to go back to the current rules for after-tax contributions but with a lower annual limit of $100,000.

This will now allow individuals to:

• make non-concessional contributions of up to $100,000 per year
• have the ability to bring forward 3 years’ worth of contributions to a single year (allowing you to contribute up to $300,000 in a single year)

The ability to make non-concessional contributions will also be limited to people who have an individual superannuation balance of under $1.6 million. In addition, if you are aged 65 or over you need to pass the “work test” to contribute to your super and cannot bring forward contributions to the current year.

The new rules will apply from 1 July 2017.  This means that for the current 2016-17 financial year people can still make non-concessional contributions of up to $180,000. Also of note is that you may still do the three year ‘bring forward’ rule, allowing a $540,000 contribution this year.

So there are still some new things to get used to, and you need to be aware of your current super balances before making contributions. But things are a whole lot better than they were back in May.

Still not sure what it means for you?

If you need assistance with any aspect of making after tax contributions to superannuation, please feel free to call Quill Group Financial Planners to arrange a time to meet so that we can discuss your particular requirements in more detail.

I was interested but not necessarily surprised to read two articles this week relating to financial fortunes of the general Australian population. The first article talked about financial literacy, where a study by Zurich and Oxford University found that Australia ranked near the bottom of the tables. In the second article, a study by the Actuaries Institute found that almost a third of Australians are in danger of running out of money because they are drawing too much out of superannuation.

With the percentage of Australians that do not currently seek any ongoing financial advice sitting at close to 80%, these reports should not be surprising to anyone. The risk of not achieving any long term goal without some form of coaching, mentoring or external direction is extremely high and it makes sense that those with a trainer, coach or in this case an adviser, have a far better chance of maintaining discipline and achieving their goals.

Why is it that so few Australians reach out for financial advice to help improve their financial literacy?

One of the reasons provided by respondents to many surveys on this subject is that the cost of ongoing advice is just too high and many feel they don’t have sufficient assets to justify the cost. This leads to a situation where those who are in most need of advice are the very ones that don’t receive any. From an adviser’s perspective, the compliance cost of providing advice in the first place drives costs up. Therefore, under the current model, I would argue that this situation is unlikely to improve.

So, what is the solution to increasing the percentages of those that do seek financial advice and thereby starting to redress the issue of poor financial literacy?

This is where I believe the role of automation, in many of the time-consuming back office processes, as well as ‘robo advice’ can make a big difference. These factors can assist advisers to drive down the cost of advice to the end consumer.

I believe that ‘robo advice’ will eventually be embraced by advisers as an opportunity rather than a threat to their profession. It can play a large part in assisting advisers to deliver a ‘bionic’ advice solution to their future generation of clients.

We have already witnessed the start of bionic advice in the US where advisers are able to combine their knowledge and strategic advice in combination with a ‘robo advice’ investment solution. This has assisted in delivering digital advice to a much larger group than otherwise possible under the traditional face to face advice model. My view is that, in doing so, a new generation of adviser will be able to efficiently inform a larger group of clients in a cost effective manner that not only meets their needs but ultimately leads to an improvement in adult financial literacy.

In summary, you don’t need to know and be across all financial jargon. The burden should be on advisers to translate the financial lingo into plain English. New apps like Superstash make this easier. Superstash is like a Fitbit for your super – convenient and game-changing.

Several months ago, I wrote a blog on the Four Corners episode which brought to light the real need to obtain financial advice when selecting an insurance policy. Just recently, I came across this article in the Sydney Morning Herald which further provides evidence on why you should seek advice. The article titled “Insurer tells family saving daughter’s life is ‘elective surgery’” is worth a read as it touches on the fine print that is often very easily missed but has a big impact on your family’s life should something unexpected arise.

Hold it in your name

I find that, in my profession, a majority of clients hold income protection within their super. As an advisor who is an advocate for life insurance, and in particular income protection, my preference is to always hold an income protection policy in your personal name. There are many reasons for this:

–          Premiums are tax deductible

–          You are able to access many more features than if you were with 100% super owned policies. This is mainly due to legislation rather than product offerings.

–          The policy is portable. This is opposed to holding it in super where you may be required to retain the super fund for the remainder of your working life if you cannot replace the policy.

Make a well-informed decision

Though my preference is to hold the policies personally, I am certainly aware that some people, due to budget constraints, are unable to fund the premiums.  This is where you need to consider the pros and cons of super vs non super and weigh up the options that best fit your circumstances. At least then you have the opportunity to make an educated decision.

Changes in Legislation

It should be noted though that since a change in legislation a few years ago, to what policies can be held inside super, we have seen more sophisticated and diverse policies available. While this prevents scenarios such as the Anderson elective surgery dilemma from happening again, not everyone offers these policies. For example, any industry fund does not offer such a policy!

This is just a summarized glance but as you can see life insurance can be a very complex world. This is why it is recommended you obtain professional advice.

Sweeping changes were introduced to the superannuation system last night in the 2016 Federal Budget.  Some good, some bad.  The key takeaway message is that Superannuation still provides a highly tax-advantaged environment for retirement savings.  In our short blog today we look at the changes, both good and bad, and outline when the measures take effect.

The Good:

Tax deductions for personal concessional contributions.  From 1 July 2017, you will be able to make additional tax-deductible super contributions directly from your own personal funds. Normally to claim a deduction, contributions would have to be made via ‘salary sacrifice’. The new measure puts employees on the same footing as self-employed people in terms of being able to top up their super with direct tax-deductible contributions. You will need to lodge a notice with your superfund.

Contributions till age 75 with no work test. Previously, after turning 65 you were required to work 40 hours in a 30 day period during the year to be able to make a super contribution. From 1 July 2017 that rule is gone, and you can put money into super whether working or not.

Increased thresholds for Low Income Spouse rebate. From 1 July 2017 you will be able to claim a $540 tax rebate for contributing to super for a spouse, even if his or her income is up to $37,000. The rebate phases out once the spouse income is over $40,000. The maximum rebate is achieved with a contribution of $3,000

Rebates on contributions tax for members earning less than $37,000. This measure takes effect from 1 July 2017 and will provide a tax offset of up to $500 for the member and has the effect of reducing the contributions tax to zero on modest contributions. Given the contributions tax is 15%, the rebate offsets all of the contributions tax on a $3,333 contribution.

Deferred Lifetime Annuities to get tax exempt status. Previously a superfund had to commence paying out a pension to obtain an exemption from tax on the fund earnings. This new measure to take effect from 1 July 2017 will allow the creation of new deferred income products, designed to provide more protection against running out of funds in old age.

The Bad:

Capping pensions at $1.6 million.  From 1 July 2017, there will be a new cap on how much can be rolled into the zero taxed pension phase. The amount is $1,600,000. This measure is to apply to current and future accounts, so there is an element of retrospectivity within this that had not been seen previously.  Existing accounts will be measured for value as at that date, and amounts in excess will need to be moved back to what is currently called ‘accumulation phase’. Earnings on funds in the accumulation phase will continue to be taxed at 15% on income, with a 33% discount for capital gains when the asset was held for more than 12 months. In the period following 1 July 2017, you will be able to accumulate more than $1,600,000 in a pension account if the increase has come from earnings.  So that date is shaping up to be a critical one.  Self managed superfunds will be able to make a smooth transition of assets back into the accumulation phase if required since it is merely a ‘book entry’ for them.

Reduction to $25,000 for concessional contributions. Currently $30,000 for people under 50, and $35,000 for those over 50, this new lower limit will apply to all from 1 July 2017.  The opportunity still exists to use the old caps this year (before 30 June 2016) and next year while still available. There will be an option to accrue the unused component of your annual cap for up to 5 years, with the aggregating to start being measured from 1 July 2017.

Lifetime limit on non-concessional contributions. This measure took effect from budget night and limits your non-concessional contributions to a lifetime cap of $500,000. The existing annual limits of $180,000 still apply in the current year and the 2017 tax year, but the ‘bring forward’ rule is now limited to a maximum $500,000. Any new non-concessional contributions from today will need to be measured against all non-concessional contributions made since 1 July 2007. If you have already exceeded $500,000 since that date, then you cannot make any further non-concessional contributions. If you have already made contributions in excess of that amount they will be grandfathered, and you will be allowed to retain those amounts in the superannuation system. The lifetime cap will be indexed to earnings in line with the concessional caps. The next change in the cap will be a $50,000 step up when AWOTE has increased by 10% or more above the 1 July 2017 figure.

Lowering the threshold at which you pay 30% contributions tax.  The Division 293 tax which levied an extra 15% contributions used to take effect when you had assessable income over $300,000 but from 1 July 2017 it will be levied once your income exceeds $250,000.

Changes to Transition to Retirement Income Streams.  Sometimes called TTR pensions, or TRIS pensions, the strategy has been a popular way for advisers to help people salary sacrifice more into super, by simultaneously drawing on a pension from super.  The added advantage was that the earnings on the assets supporting the pension payments moved onto a tax-free status.  From 1 July 2017, the tax exemption on the earnings of these pensions will be removed, and the fund will be paying 15% tax on income with a 33% discount applying to capital gains over 12 months.  Retrospectivity also applies here. So it doesn’t matter that your pension commenced a year ago, last night, or next week. The status remains the same for now, but from 1 July 2017, the tax-exempt status on the income in the fund will change.  The planning opportunity here will be around what is called ‘condition of release’. Currently, and in future, it appears that as soon as you have met a condition of release and have unrestricted non-preserved status on the assets, a normal pension, with no cap on the withdrawal amount and no tax on the account earnings can be commenced.  It is important to consider the implications of current and proposed funds with your adviser.

Summing up:

Our title says it all. Super is still super, providing many tax benefits to those who make use of the system. Political and budgetary pressures mean that the government has made it a little bit less ‘super’ by reducing and capping contributions and size of pensions. However, even for those with large super balances, the concessional tax rate of 15% will still be lower than their personal marginal rates if the assets were held outside of super.  Out of adversity comes innovation and we believe that there will be new retirement products created in the next few years that will help to ensure a comfortable retirement for those who get good advice on their retirement structuring. As always, be sure to keep in touch with your adviser on how the changes affect you, and what new opportunities are available to you.

It appears that every politician has a suggestion on how to reign in budget spending in the lead-up to the May budget.  Most people I talk to agree that government spending needs to be curtailed and the ageing population does mean that politicians of all persuasions need to keep a close eye on health and welfare spending. After all, it accounts for an increasing slice of the budget expenditure. Therefore, it never surprised me that the Superannuation chestnut has once again been dragged out as a means to fill this widening gap.  Everything from higher taxes, lower concessions and even early access to Super in order to fund education and housing has been discussed. The problem I see with this is that Australia already has a major retirement savings shortfall and any further meddling with the system can only exacerbate the problem.

The numbers don’t look good.

Research by HSBC found that Australia now has the largest shortfall of retirement savings in Asia and the fourth largest in the developed world.  The average Australian expects to live 23 years in retirement and yet their savings on average will currently only last 10 years.  Therefore, any further negative press around super can only make this situation worse and providing early access to super, hoping that somehow younger people will miraculously make up this shortfall later in life, is very hard to believe.  The power of compounding interest would suggest that someone aged 25 is going to need an injection up to 10 times the amount they withdraw today when they reach age 65. This research also found that 1/2 of all Australians who had retired wished that they had of started saving earlier in life.

Is a comfortable retirement simply a dream or is there a better solution?

After 25 years of helping people plan for their retirement, I would suggest the secret is not how large an inheritance is or what a person earns but rather something more achievable by most.  There is no denying that a large income or lump sum injection can make the process easier but starting early, having a plan and applying some discipline to saving can go a long way to achieving any financial goal.  Time and time again I see the power of compounding at work when young people start investing small amounts over long periods of time.  Of course, superannuation is an important step in the right direction but I believe that this is only the beginning. Apart from super, other forms of savings are also important and can then be accessed at any time to fund the car purchase, holiday, education and supplement their retirement savings.

Final Thought

Our ageing population and increased longevity suggest that most people are going to find it very tough in retirement without adequate savings. I believe some of the suggestions being made at the moment are more about short-term politics than long-term solutions.  It was very interesting to see Peter Costello come out in the press recently urging the treasurer not to play with Superannuation. I guess it gets a bit easier to have a more considered view once you leave politics.

SuperStream was announced by the government early 2014 and aims at improving the efficiency of the superannuation system. Employers must make super contributions on behalf of their employees by submitting data and payments electronically in a consistent and simplified manner.

SuperStream is compulsory for employers making super contributions, as well as self-managed superannuation funds (SMSF) receiving contributions. The aim of SuperStream is for employers to gain greater efficiencies and accuracy when meeting their super obligations, with potential benefits including:

• Ability to use one channel to make contributions on behalf of all employees, regardless of how many super funds are recorded
• Less time spent dealing with funds regarding the accuracy of employee details and data
• Automation of reporting and processing of contributions and payments
• More timely flow of information and money in meeting superannuation obligations.

Starting from 1 July 2015, the SuperStream measures are in effect for all businesses employing staff. For most small businesses employing 1 to 19 employees, they will have until 30 June 2016 to meet the SuperStream requirements when paying and reporting superannuation contributions. All other businesses employing 20 or more staff should have implemented SuperStream and be compliant as at 30 June 2015.

To be compliant for SuperStream, your options may include:

• Processing contributions through your payroll software
• Engaging an outsourced payroll function or similar service provider
• Utilising the free Small Business Superannuation Clearing House (19 or fewer employees)

If you are already submitting your data and payments electronically through your payroll software or clearing house, you won’t be required to make any changes.

Businesses and clients currently using Xero can also utilise the automated function within the software that enables automation of reporting and payment of superannuation contributions. Superannuation through Xero is powered by ClickSuper, who is an approved Xero partner and SuperStream compliant service provider. Set up is free and easy within Xero, and will allow employers to enjoy greater efficiencies and time savings.

Our highly trained and qualified payroll professionals are ready to assist if you should ever need help to set up your payroll system to become SuperStream compliant.

A question we often get asked is whether children – either minors or adults – should be included as members of your SMSF. In this article we run through key things to thinking about before adding children to your SMSF including some common situations where it can go horribly wrong, and the few occasions when you may be able to make it work.

Benefits of adding children to your SMSF

Firstly, let’s start with the positive. SMSFs are fantastic vehicles for building wealth and when operated correctly can boost the financial literacy of all members regardless of age and you can have up to four members in an SMSF – so why not take advantage of it?

I’ve seen a handful of situations where introducing teenagers to an SMSF when they commence work (and receiving small amounts of super) has been a catalyst for those younger members to get actively involved involved in the investment of their super savings.  Simply by having engagement with their super at an earlier age these members will already be ahead of the majority of the population when it comes to savings and wealth creation and should spark them to have a greater financial interest in not just their super, but the entirety of their wealth.

SMSF investment strategies are key

To correctly introduce younger members to a ‘family’ SMSF, it is important that their benefits are segregated from the assets of their parents within the fund.  This should be done through the use of separate bank and investment accounts, and the SMSF accountant or administrator must have the skills and systems to handle segregated investments without incurring significant additional administration costs.

It is also important to note minors are under a legal disability and cannot act as trustee of an SMSF or as a director of the SMSF trustee company.  Their parents will need to act on their behalf until they turn 18.

Only add suitable adult children to your SMSF

Every family is different, and every child within a family is different.  The trick is to ensure that only the right type of person is invited into the family super fund.  If an adult child is not good with managing their own personal finances, then chances are they will not work well within an SMSF environment are would be better staying with a retail or industry fund.

Another motivating factor for inviting children into an SMSF is to enable the inter-generational transfer or family assets – such as a farm or a property used in the family business.  Although these strategies are possible, they need to be structured and handled correctly.

In most cases I would recommend that family business (real) property is purchased in a fixed unit trust, with the SMSF owning 100% of the units.  This enables flexibility in the future if the ownership needs to be split across different SMSFs or enable the SMSF to purchase the property directly from the unit trust using an LRBA.

The above are some scenarios where including children may work. Now let’s have a look at the (longer) list of scenarios where things can go wrong.  Horribly wrong: