Back to basics with super advice

There are many misconceptions hindering individuals from getting the maximum advantage from their superannuation. Liz Westover - superannuation, SMSF and retirement savings partner at Deloitte - examines 10 common myths and illustrates how debunking them can assist people to make the most of their retirement savings.

When superannuation and SMSFs become your day-to-day working life, you become very familiar with the rules and regulations that dictate how you and your clients operate. So much so, that it is easy to forget those outside our industry, including our peers and our clients, don’t have the same insights as we do. What we refer to as ‘the fundamentals’ are not necessarily thought of in the same way by others. We can all too easily assume that because most Australians have at least one superannuation fund, they must understand at least the basics of super, but unfortunately that couldn’t be further from the truth. Consequently, many myths and misunderstandings continue to abound.

Much of our ongoing training is in relation to the latest strategies and changes in laws and this is often the updates we provide our peers and clients. But perhaps it’s time to go back to basics and offer a refresh on the fundamentals. Change has been the one big constant in the superannuation industry and that’s caused confusion and disengagement. A back-tobasics approach may be what’s needed to re-engage our clients and get them thinking more proactively about their retirement savings.

Following are 10 of the more common features of superannuation and SMSFs that are frequently found to be misunderstood and will assist in starting the conversations that need to be had with colleagues and clients.

1. There is a limit on how much an individual can hold in superannuation

It is still surprising how many people, including many in the tax profession, who believe the $1.7 million transfer balance cap refers to how much can be held in superannuation in total. As SMSF advisers will know, the $1.7 million transfer balance cap refers to the maximum commencement value of a retirement-phase income stream and a $1.7 million total superannuation balance will restrict an individual’s ability to make further non-concessional contributions, but it is not a limit on the size an individual can hold in super. This misunderstanding frequently leads to confusion and disengagement with superannuation because trustees and their advisers don’t consider certain strategies as they mistakenly believe they won’t be available due to a person’s total super balance, for example, an individual’s ability to make downsizer contributions or a small business capital gains tax contribution. Neither are restricted by total super balance and neither will be denied because they would cause an individual to exceed $1.7 million in their total super balance.

2. The general transfer balance cap is a limit on the ongoing balance of an income stream

The general transfer balance cap, currently $1.7 million, is the upper limit on the commencement value of an income stream. It is not a limit on the ongoing balance of an income stream account. If an individual is fortunate enough to have investment earnings that exceed the mandatory minimum withdrawals from these accounts, then the balance of their income stream account will exceed $1.7 million over time. This is of no concern and in fact with the strong returns on the stock market over the past 12 months, is quite common.

3. Superannuation death benefits automatically form part of an individual’s estate on death and as such will be paid based on the terms of that person’s will

One of the biggest misunderstandings in relation to superannuation is what happens to an individual’s benefits when they die. They do not automatically form part of an individual’s estate unless they are specifically directed there or there are no eligible beneficiaries. As such, an individual’s will has no jurisdiction over the payment of death benefits unless and until those benefits are paid or directed to the estate. Death benefits can be paid to the estate if directed there under a binding death benefit nomination (BDBN) or by the remaining trustees or legal personal representative of the deceased. The fund deed may also influence the payment of death benefits.

4. There are no restrictions on who can be nominated to receive death benefits from a super fund

It’s not surprising most people would not appreciate that superannuation law is quite specific about who is able to receive super death benefits. After all, it’s not unreasonable they would believe their benefits could be paid to whomever they choose.

However, as advisers will know, there are eligible classes of beneficiaries to whom super death benefits can be paid directly from a fund, being spouse, children, financial dependants and those in an interdependent relationship with the deceased member. Unless they can meet the definition of the latter two, which is not that easy to do, parents and siblings are not eligible beneficiaries and as such, a super fund cannot pay death benefits directly to them. Many younger people in particular frequently nominate their parents or siblings to receive their death benefits without understanding these people can’t actually receive benefits directly from their fund.

In the absence of an eligible beneficiary, benefits will be paid to the deceased’s estate (legal personal representative) and then distributed as per the terms of that person’s will. The same restrictions on who can receive benefits do not apply when they are paid via the estate. As such, if an individual wants a ‘non-dependant’ to receive their superannuation death benefits, they will first need to direct their benefits to their estate and then nominate that individual to receive the benefits in their will.

5. There are no death taxes in superannuation

There is a frequent misunderstanding about the application of ‘dependant’ in superannuation, particularly when paying death benefits. The definition of dependant in super law dictates who can receive death benefits and the definition in tax law determines if and how a recipient will be taxed. There is a difference in the two definitions – the main one being that of adult children. Super law says all children are dependants so they are eligible to receive death benefits, but tax law says adult children are not dependants for tax purposes so will not receive death benefits tax-free. So, while we don’t call them death taxes per se, superannuation death benefits paid to a non-tax dependant, including adult children, will be taxed on the taxable component of the deceased’s benefits.

6. Reversionary nominations are all that are needed for superannuation estate planning

It is quite common for spouses to nominate each other as the reversionary beneficiary of their income streams in the event of their deaths. While this can be a good start in working through estate planning issues in superannuation, it needs to be remembered the reversionary nomination only works for one of them and, as such, they need a back-up plan as well for dealing with death benefits once one of them passes and a reversionary nomination is no longer valid. This can be where a BDBN can be useful as a cascading form of death benefit nomination. That is, a reversionary nomination would take effect first on the passing of one spouse, then the BDBN would be in place to deal with death benefits on the passing of the second spouse. There are also other estate planning strategies and this is arguably one of the biggest gaps in advice to SMSF members.

7. The concessional contributions cap refers to personal contributions only

Advisers frequently remind clients of the concessional contributions caps and their ability to make personal deductible contributions. This is particularly so this financial year with the increase in the caps to $27,500 a year. However, it may be worth ‘joining the dots’ a bit more and making sure clients understand what a concessional contribution is and the types of contributions that will count towards that cap. It is not a cap specifically for personal deductible contributions that are more often only used to top up contributions to the cap limit after employer superannuation guarantee and salary sacrificed payments are made. A reminder of this to clients could prevent any potential excess contributions being made.

8. Once an income stream is commenced, contributions can no longer be made into super

There is an element of truth in this myth. Once an income stream is commenced, that account can no longer be added to using contributions. However, having an income stream does not mean further contributions cannot be made for or by an individual into superannuation. Such contributions will be made to the accumulation account of the member and once a condition of release is satisfied on the accumulation account, it can be used to commence a new income stream account or accessed by way of a lump sum.

Commencing an income stream in and of itself does not restrict an individual’s ability to make future contributions into super, but it is worth remembering that at the time an individual commences an income stream, they may also face some restrictions on their ability to make further contributions into superannuation, which could include age-based restrictions and/or passing a work test.

9. Contributions to super can only be made while working

There is no doubt there is a strong link between working and the 10 per cent compulsory superannuation guarantee. The work test also currently applies for individuals over the age of 67 (up to age 75), allowing them to make or have made for them contributions other than mandated employer contributions if it is satisfied. However, for most Australians up to the age of 67, there is no nexus to work that would limit their ability to make contributions to superannuation personally.

Confusion still exists largely because up to 2017, individuals who were receiving superannuation support from employers were not allowed to make personal deductible contributions (this was due to what we knew as the 10 per cent rule), but this no longer applies. As such, subject to other restrictions, including the total superannuation balance, contributions caps and age-based limits as outlined above, individuals are able to make contributions regardless of their work status.

10. It’s not worth contributing to super because the rules keep changing

This could well be one of the hardest myths to bust, mainly because the rules do keep changing. However, our superannuation system is arguably the most tax-effective place to save for retirement. It will likely continue to be so because the government has a strong incentive to encourage superannuation savings to diminish any future potential reliance on social security and the age pension scheme. So, even if the rules are changing, its overall attractiveness as a savings vehicle will not likely change.

Superannuation can be confusing. It has complex laws and rules that are forever changing. A back-to-basics approach may be a great way to re-engage clients and educate our peers so they are having quality conversations with their clients as well. Strategies to maximise retirement savings are important, but fundamental misunderstandings about the rules of our super system will always undermine attempts to advise on and implement these strategies.