After some recent financial planning work to help a family here in Newcastle to deal with the financial impact of a terminal diagnosis of cancer, I thought this article was worth sharing. Here is a great reason why you should think before you draw all of your balance from your superannuation, even if the legislation supports you making a full withdrawal, in the situation of retiring fully, applying for an early release of superannuation due to serious disability or terminal illness.
Here’s a question you might want to ask of your super fund: does it make anti-detriment payments? If not, your dependents may miss out on a boost to any future death benefit they might receive from your super.
What is an anti-detriment payment?
In a nutshell, prior to 1988 superannuation funds were taxed on exit at a rate of 30%. Death benefits paid to dependents were, however, tax-free. In 1988 contributions started to be taxed at 15% on entry and a further 15% on exit, which meant that death benefits would be reduced by the contributions tax paid. As a result the rules were altered to allow the contributions tax to be returned to beneficiaries. This tax refund is called an anti-detriment payment (ADP) and the amounts involved can be significant.
Take the example of Geoff who joined his super fund in 1990. Over the next 25 years his employer and salary sacrifice contributions added up to a total of $180,000. On his death in 2015 his super fund opted to pay an ADP, increasing the death benefit paid to his spouse by $27,000.
Who can receive an ADP?
ADPs are only payable when lump sum death benefit payments are made to eligible dependents of the deceased member. Eligible dependents are a spouse or former spouse, a child, including an adult child, or the trustee of the deceased’s estate. When paid to the estate, the amount of the ADP is determined by how much of the death benefit is paid to eligible dependents.
Where does the money come from?
Most large superannuation funds have accumulated reserves from which these payments can be made. They don’t come from other members’ accrued benefits. The super fund then claims a tax deduction against the earnings of the fund, so the ADP really is a genuine refund by the tax office.
As Geoff had stuck with one fund that held all of his contributions, calculating the ADP was pretty straightforward. However many people move from fund to fund or have multiple funds, complicating matters. Fortunately there is a formula that super funds can use to calculate ADPs involving the taxable component and days of service. It’s a bit complicated, but don’t worry, we can assist you with this.
It can be difficult for anti-detriment payments to be made from self-managed super funds (SMSFs). Most SMSFs do not have accumulated reserves, so they may simply lack the ability to make the payment. Although it might be permitted by the trust deed and desired by the members, ADPs cannot be made from the deceased’s account or the account of another member.
Seek expert advice
For the family we are helping right now, this has the potential to increase the final superannuation balance available by some $80,000. It’s certainly worth asking the question if an anti detriment benefit is part of your fund.
If you have dependents and are a member of a public offer or large superannuation fund, ADPs are a definite plus. It’s worth finding out if your fund pays them.
In the case of self-managed super funds, it is crucial to get expert advice on the pros and cons and the ways and means of making ADPs. Talk to Insight Wealth Planning. We specialise in helping people with complex matters, making them simple and relevant to you. Call for a chat on 02 4941 1888.