Conversations about superannuation usually involve the topics of returns, fees and the benefits of self-managed funds but rarely, if ever, is there talk about death benefits.
People spend the entirety of their working lives accumulating wealth for their retirement, but many of us don’t do much other than write a name and tick a box on a form about where that nest egg will go if we die before we get to spend it.
Even once a beneficiary is named, there are still things to consider such as whether they will get a lump sum or a pension, or if the children will get any money.
As Canberra mother of three Rachel (last name withheld) recently found out, in some cases there are even more rules to consider beyond that.
Rachel’s husband was a Public Sector Superannuation (PSS) fund member and he died six years ago. The couple thought they had covered everything prior to his death, but she now finds herself battling with the Commonwealth Superannuation Corporation (CSC) regarding payments to her eligible children.
Rachel’s husband was 30 when he found out he had cancer, and from then on he was not able to get any life insurance.
“We pumped as much money as we could into his PSS fund because that was the only way we could plan and pay for a pension for me and our children,” says Rachel.
Her husband died when he was just 43.
While Rachel’s husband was still alive, the couple made plans to take part of the superannuation as a lump sum and the other part as a pension thinking that a regular pension would help pay for expenses for the children. The death benefit portion means Rachel receives 67 per cent of her husband’s pension and her three eligible children each receive 11 per cent.
What Rachel and her husband hadn’t realised was how tight the PSS rules for beneficiaries are. Under current rules, an eligible child must prove they are in full-time education to receive the benefit between the ages of 18 and 25, when they stop being eligible. Until recently, that age was 16.
Rachel’s children are now 21 and 18 and she is challenging the rule that says children cannot receive their 11 per cent directly unless they are living away from home. She argues that if their portion goes to her, they are taxed at a higher marginal tax rate because she is already earning income from her employment.
“By paying their 11 per cent to me, half of it is deducted in tax, and, if my children cease full-time education, the money stops altogether,” she says.
Rachel is urging PSS members to be aware of what will happen to their money if their children are living at home, but are not in full-time education.
“Public servants should know that this is how their super scheme will treat their dependents in the event of their death,” she says. “We didn’t know.”
RSM Financial Services Australia financial adviser Chris Oates says the reason for the payment being made to the parent is that the child is still considered dependent on their parent and therefore the parent is receiving the additional pension to help meet the costs of supporting their child.
“Unfortunately this means the additional payments are taxable to the parent rather than the child,” he says.
“In some cases it seems like a very complex policy to determine if someone is a dependent or not. The PSS has a very clear policy for providing for a spouse as a beneficiary, but does not provide the same level of support to other dependent beneficiaries such as children.
“When talking to clients about claiming their PSS benefits, we always have the conversation about if they want to leave any money to their kids. A spouse will receive a pension for the rest of their life, however there is very little chance that children will receive any benefits from a PSS pension.
“Everyone’s circumstances are going to be different, but it is always better to seek advice so if the worst happens you know what will happen with your money.”
Region Media sought comment from the CSC, who declined to be interviewed saying they were not able to comment on specific cases as issued in the following statement:
“CSC always puts our customers first, ensuring they receive the maximum entitlements available to them within the rules of relevant legislation.
“Specifically in this case, the PSS Trust Deed assumes that children are financially dependent on a parent if they are living in the same house. If the child is not living in the same house, they are assumed not to be financially dependent, in which case payments may be split between parent and child/children.
“We will continue to work directly with the customer to address their specific concerns on this matter.”