Leaving your super to your children?

It’s worth planning ahead

You’ve worked hard, carefully growing your super, and you’re proud of what you’ve built. Your plan is simple: whatever is left will one day go to your adult children. Unfortunately, it might not reach them quite the way you imagine.

It’s one of the least understood parts of retirement planning, and one of the most important. This month, here’s what we all Need2Know about what happens to your super when you’re no longer here.

“You’ve spent years building your super to support your retirement and, hopefully, leave something for the people you love. But have you stopped to consider what they might actually receive? It’s a conversation worth having, because a little planning today could make a meaningful difference tomorrow.” — Ursula Boorman, Financial Planner, Direct Advisers

Your super doesn’t automatically follow your will

Many people assume their super is treated like the rest of their estate. It isn’t. Super sits outside your will and is paid according to the rules of your fund and the nomination you’ve made.

Who receives it matters too. Under tax law, your spouse and any children under 18 are treated as ‘dependants’, and they receive your super tax-free. Adult children who are financially independent are treated as ‘non-dependants’. That single distinction is what most people don’t see coming.

Why part of it can be taxed

Your super is made up of two parts. The ‘tax-free component’ comes mostly from after-tax money you’ve put in yourself. The ‘taxable component’ comes from employer contributions, salary sacrifice and investment earnings built up over the years. For most people, the taxable component is by far the larger of the two.

When super is paid directly as a lump sum to a non-dependent, such as a financially independent adult child, the taxed element of the taxable component can generally attract tax of up to 15 per cent plus the Medicare levy (usually 2 per cent). Different rates may apply to any untaxed element, and the outcome may differ when the benefit is paid through the deceased estate.

Consider a couple in their late 70s who have around $500,000 in super, and roughly $450,000 of that is the taxable component, which is common. If it’s paid to their adult children, the tax could be in the order of $76,500. That’s money leaving the family rather than passing on to the next generation. The actual result depends on the benefit and how it is paid.

This isn’t a reason to panic. It’s a reason to plan.

The downsizing opportunity

Many people don’t realise downsizing is not only a way to boost retirement savings, it may also create estate planning opportunities.

When you sell an eligible home, you may be able to make what’s called a ‘downsizer contribution’. If you’re 55 or over and you or your spouse have owned the home for at least 10 years, you may each be able to contribute up to $300,000 from the sale proceeds to super, subject to the eligibility rules. Generally, you must make the contribution within 90 days of settlement, unless an extension is granted.

Downsizer contributions are different than other contributions – they land in the tax-free part of your super but don’t count towards the non-concessional cap. And with the right planning, that can be one way to lift the tax-free portion of what you eventually pass on to your children.

What surprises people most is how open this rule is. You don’t need to still be working to use it, there’s no upper age limit, and even a large super balance won’t rule you out.

Still, it won’t suit everyone, and both your circumstances and the tight timeframes involved matter a great deal. This is a conversation to have with your adviser rather than a decision to make on your own.

Preserving wealth for the next generation

Most retirement planning focuses on the years you’re living: your income, your investments, your Centrelink position. Far fewer people stop to think about what happens to their super afterwards, and whether some of it could be protected for the people they love.

For some families, that’s the difference between leaving a little more to children and grandchildren or watching a meaningful amount go to tax instead.

Your next step: Make sure your super goes where you intend

You’ve worked hard to build your retirement savings. Taking a little time now to understand what happens to your super when you’re no longer here could make a real difference to the people you leave behind.

A good place to start is by reviewing your super beneficiaries, understanding the tax components of your super and considering whether your existing arrangements still reflect your wishes.

You don’t need to work through this on your own.

If you’re unsure where you stand, let’s have a conversation. Together, we can review your current arrangements, identify any opportunities worth considering and help ensure your super forms part of a well-considered estate plan.

Contact Ursula and the Direct Advisers team on 02 5583 7588 or arrange a conversation here.

Original publication: Greater Port Macquarie Focus, Need2Know contributor column. Transcribed for editorial updating; financial rules and examples should be reviewed before republication.