Associate financial advisor Hannah Elliott said you need to make sure your superannuation beneficiary is valid. (Source: Instagram/Getty)
Australians are being warned about a superannuation rule when it comes to naming their beneficiaries. You're allowed to choose your partner, child, or a dependent to receive your retirement nest egg in the event of your death.
However, two groups you're not allowed to directly offload your wealth to are siblings and parents. Hannah Elliott, associate advisor from Stellar Wealth, told Yahoo Finance that many Aussies are unaware of this caveat when they're organising their superannuation.
"In many cases, if an invalid nomination is made, the super fund will simply accept it as a non-binding nomination without providing any warning or follow-up," she said.
"This is because they assume the member has read and understood the eligibility criteria when completing the form.
"While some funds may reach out to flag an invalid nomination, in my personal experience, that hasn’t always been the case."
She said it's usually only when people are sorting out their finances with a legal or financial expert that they discover this non-binding arrangement.
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If you die with an invalid beneficiary, it will be up to the trustees of each super fund to decide where to send your money.
This can slow down the payout process, and other beneficiaries can make a claim on your superannuation if they wish.
Each state and territory also has different rules on where the money is meant to go if you don't indicate it in your Will or estate.
Why can't you nominate siblings or parents to be your superannuation beneficiary?
Australia's superannuation rules dictate that only someone who is classed as a dependent can be nominated as a direct beneficiary.
Because siblings typically live separate lives from each other, as do parents from their children, they don't fall within the typical category of dependent.
First Financial's James Wrigley told Yahoo Finance the system has been designed with fairly strict circumstances in mind.
"It stems back to the whole purpose of super, which is to provide for your retirement," he said.
"In the event of an early death, it's to provide a benefit to your beneficiaries, and a line has to be drawn somewhere as to who's a dependent and who isn't."
However, siblings or parents could still end up as beneficiaries for someone's super if they fit the strict criteria of holding an interdependency relationship.
You have a close personal relationship with your sibling
You live together
One or both provides the other with financial support
One or both provides the other with domestic support and personal care
Who can you nominate instead?
There are only three groups that you can nominate as a direct beneficiary of your superannuation:
Your spouse or de facto partner
Your child (and they can be any age)
Someone in an interdependency relationship with you
What if I really want my sibling or parent to be a super beneficiary?
Thankfully, there is a way around the rules.
You can set up a binding death benefit nomination with your legal personal representative.
They're usually the executor of your Will, and they can receive your superannuation payout before handing out the money to those named in the legal document.
"However, this approach can still involve legal complexity and does not always guarantee the intended outcome," Elliott told Yahoo Finance.
"Given how nuanced this area is, it’s strongly recommended to seek legal advice in addition to financial advice when planning superannuation death benefit nominations."
The only hitch with going down this route is that your money could be taxed on the way out to those non-direct beneficiaries.
"If a superannuation death benefit is paid to someone who is not a tax dependant under the Income Tax Assessment Act 1997, they may be liable for 15 per cent–30 per cent tax, plus the Medicare levy on the taxable component of the benefit," she added.
Aussies shocked over superannuation beneficiary rules
Elliott posted a video about how the superannuation system worked with beneficiaries and many couldn't believe they had to jump through so many hoops.
"I’m in this situation trying to settle my late mothers super account, it’s been 14 months and counting. Such a slow process. Non-binding beneficiaries mean nothing and the trustees determine how the money is distributed," said one Aussie.
"The law needs to change. Someone nominates someone - their wishes should be respected," added another.
Wrigley said the superannuation beneficiary system can seem convoluted to everyday Aussies.
Financial advisor James Wrigley said it's important to have a Will organised so that your money and assets go to the right place after your death. (Source: First Financial/YouTube)
But he added that this complexity highlighted a really important step that all Aussies need to take.
"Everyone should have a Will, regardless of what their age is, even if they are 18 or 19 years old," he told Yahoo Finance.
"Then you have to have the appropriate beneficiaries on your superannuation for the particular time of life that you're in. And that may change over time."
Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstances before acting on it, and where appropriate, seek professional advice from a finance professional.
