Death benefits

Remove lump sum restrictions

Death benefit lump sum limits IFPA Institute of Financial Professionals Australia Pre-budget submission

Limits on the number of death benefit lump sums from superannuation are restrictive and should be removed to prevent breaches of the super regulations.

Restrictions on the number of death benefit lump sums from superannuation should be removed in recognition of the fact benefit payments may require multiple transfers to a beneficiary and the law is too restrictive in its treatment of them, according to the Institute of Financial Professionals Australia (IFPA).

The professional body called for the two lump sum limit to be removed from death benefit lump sum payments as part of its 2024/25 pre-budget submission, claiming the death benefit settings of the superannuation system no longer fit the needs of fund members.

Pointing to Superannuation Industry (Supervision) (SIS) Regulation 6.21, IFPA said where a deceased person’s super was paid as a lump sum, it must be a single sum or an interim amount and a final lump sum, and these limits apply to each dependant and each interest held by the deceased.

“Having a maximum of two lump sums per dependant poses a problem where the surviving trustee wants or must pay multiple transfers of death benefits, such as different parcels of shares or other fund investments to the beneficiary or to the legal personal representative (LPR),” it stated in the submission.

“Where the deceased member has directed the trustee to make certain transfers to their beneficiary or LPR, the trustee is required to comply with the direction. This means each cash payment or in-specie transfer of shares or investments to the beneficiary or LPR will be treated as a separate lump sum.

“In this situation, if the death benefit consists of more than two lump sums, the requirements of regulation 6.21 would be breached.”

IFPA added the requirement to make death benefit payments in no more than two lump sums was “unnecessarily restrictive, often impracticable, and superfluous, especially given that death benefits are, in any event, required to be paid as soon as practicable”.

“Our association would like to see a practical approach provided in the legislation which would allow multiple lump sums being paid as soon as practicable. This change would overcome the technical issues that now exist and inadvertently lead to breaches of the SIS Regulations,” it said.

In the same recommendation, it also called for changes to binding death benefit nominations (BDBN) outside SMSFs, stating they should not lapse after three years and should apply until revoked or replaced, and informal BDBNs should be recognised.

“Like a will, if a BDBN does not meet the strict requirements, it should nonetheless be binding if it shows a clear intention to deal with superannuation benefits,” it said.

“The case law in this area shows many BDBNs failing on minor technicalities due to an emphasis on the importance of form over substance.”

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