Super: read between the lines

In the lead-up to choice of fund, many clients and advisers may be comparing superannuation funds. When evaluating the merits of one superannuation fund over another, it is, perhaps, common to compare the fees, investment options and administration capabilities offered by the funds.

While many financial planners may consider that, other than for the features described above, all superannuation funds are more or less the same, the technical features of superannuation funds do differ significantly, and should play an important part in any analysis of different super funds for different clients.

Ignore at your detriment

There is a grandfathering provision under tax law that attempts to eliminate the detrimental impact of tax law amendments that were initiated in 1988, in particular the introduction of the 15 per cent contributions tax.

Basically, the anti-detriment provision applies to the lump sum eligible termination payments (ETPs) payable to a deceased client’s dependants (as defined under tax law). The provision theoretically claws back contributions tax charged against a member’s account (usually based on a prescribed formula). This provision allows the lump sum ETP ordinarily payable upon death to be grossed-up by the value of the clawed back taxes.

Some superannuation funds choose not to pay this amount. However, many superannuation funds will pay anti-detriment benefits (subject to the conditions above) to the benefit of the dependants of the deceased member.

Death benefits

Following the death of a superannuation fund member, any interest in a superannuation fund will generally be payable to dependants or to the estate of the deceased member.

Unfortunately, superannuation assets can cause difficulty in the execution of the client’s estate plan if these assets are not appropriately directed.

However, it is generally possible to direct superannuation assets via a valid nomination of beneficiary. Superannuation funds may allow members to put in place a binding or non-binding death benefit nomination. The nomination of beneficiaries is limited to those who qualify as a dependant under superannuation law, or the legal personal representative of the member.

Generally, a binding nomination will need to be updated every three years. If the binding nomination is ineffective at the time of the member’s death, then the non-binding provisions under the trust deed will generally operate as the default.

A valid binding nomination restricts the trustee’s ability to pay the benefit to anyone other than the persons nominated. Generally, the trustee still retains the right to pay the death benefit as a lump sum or commence a pension.

In comparison, a non-binding nomination gives the trustee an indication as to whom the death benefit should be paid to. The trustee will usually review the deceased member’s will, death certificate and other key documentation before making a decision.

Roll over

Tax law prohibits the rollover of a death benefit ETP. As such, it is paramount that a superannuation fund offers an income stream that is able to accommodate the financial and estate planning needs of your client’s beneficiaries.

Dependants

The payment of a superannuation pension to a deceased member’s dependant is usually assessable against that dependant’s relevant reasonable benefit limits (RBL). This said, a child pension payable to a minor under the same scenario will not be assessable against the child’s RBL.

Opportunely, a child pension may be payable under the product’s governing rules. This may be a beneficial planning strategy for clients and dependants who would otherwise be subject to significantly higher taxes.

Disabled members

The Australian Taxation Office’s view is that pensions payable to disabled members under the age of 55 by superannuation funds that do not have disability pension provisions will not qualify for a tax offset.

Many superannuation funds are able to offer disability pensions because of the relevant provisions in the governing trust deed.

Reversionary beneficiary

A client may be able to nominate their spouse or child as a reversionary beneficiary of their allocated pension.

From a tax and a social security perspective, setting up a reversionary income stream may significantly reduce the deductible amount of your client’s allocated pension.

This is because the relevant number to be used will be the higher of the primary pensioner’s and reversionary beneficiary’s life expectancy.

For this reason, some choose to avoid nominating a reversionary beneficiary, instead relying on the trustee to revert the income stream to a nominated beneficiary — usually the spouse.

Adviser remuneration

In a choice of super fund environment, many fund members will be seeking advice regarding their super fund alternatives.

Some superannuation funds will allow the cost of this advice, or part thereof, to be deducted from the member’s superannuation fund balance by way of entry, trailing or other fees providing additional flexibility to members seeking advice.

In-depth comparisons

It may be easy to overlook some of these issues on the grounds that they may only benefit some clients.

However, when evaluating different superannuation structures it often pays to look below the more obvious features to the technicalities of the underlying structure.

The technicalities of a superannuation fund can make a substantial difference to its ability to meet the ongoing needs of clients.

Andrew Lowe is national manager — technical services at ING Australia .