The superannuation death benefits system needs reform to align it with contemporary family and relationship structures, the Institute of Financial Professionals Australia (IFPA) has claimed.
The professional body made a call for changes in its pre-budget submission, which noted the death benefit settings inside the superannuation system have remained unchanged for decades and those considered eligible to receive death benefits no longer reflects current Australian society.
IFPA head of technical services Natasha Panagis said: “Many Australians have close, enduring relationships with siblings, parents, extended family or even non-family members who are effectively treated as family, yet the super system still doesn’t recognise these relationships.
“People should be able to direct their super to those they genuinely consider family, without being forced into costly estate workarounds or unfair tax outcomes.”
The submission pointed out the prescriptions in superannuation law meant death benefits could only be paid directly to a limited group of dependants, such as a spouse or de facto partner, a child of any age and anyone who was either in an interdependency relationship with the deceased or financially dependent on them at the time of passing.
“Rates of single-person households have risen significantly and many individuals have close, enduring relationships with people who fall outside the definition of a superannuation dependant, such as siblings, parents, nieces or nephews, other relatives or non-family members who are effectively treated as family,” it stated.
“Despite the strength and longevity of these relationships, members are unable to directly nominate such individuals to receive their superannuation death benefits.
“In these cases, members are forced to direct their superannuation through their estate in order to benefit their chosen beneficiaries, adding unnecessary complexity, cost and risk.
“A more flexible, eligibility-based approach would better reflect contemporary relationships, support member choice, reduce disputes and minimise reliance on estate-based workarounds, while maintaining appropriate safeguards within the superannuation system.”
In terms of immediate action to improve the situation, IFPA recommended allowing the payment of more than two death benefit lump sums.
“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),” the submission noted.
It added each cash payment or in-specie transfer of shares or investments to the beneficiary or LPR will be treated as a separate lump sum and would breach Superannuation Industry (Supervision) Regulation 6.21 if more than two payments were made.
“It is submitted that the requirement to pay no more than two lump sums is unnecessarily restrictive, often impracticable and superfluous – especially given that death benefits are, in any event, required to be paid as soon as practicable,” IFPA stated.
It also called for the removal of the three-year lapse period for binding death benefit nominations and, like a will, they should apply until they are revoked or replaced.
It also proposed ‘informal’ binding death benefit nominations should be accepted and where they do not meet the strict requirements, but show a clear intention to deal with superannuation benefits, should be considered as binding.
