Money and Life
(Financial Planning Association of Australia)
By the time you retire your super may be one of your biggest assets. So when it comes to a divorce, it's a very important part of a financial settlement. Find out from legal and financial experts what you need to know, and what to keep in mind when it comes to super and separating your family finances.
Splitting your financial assets during divorce is often a complex and difficult process. In the first in our series of features on sorting out money matters after a relationship ends, we take a look at super.
Just how important is my super?
As something that many of us won't actually benefit from for many years, super can end up taking a back seat in the settlement carve-up. But according to our two experts, Alison Fischer, CFP®, Private Client Adviser for Crosbie Wealth Management and Donal Griffin, Director of Legacy Law, you'd be wise to give some very careful thought to how super should be treated in your financial settlement.
"The family home is the asset that's often the most emotional and hard fought," says Donal. "It represents stability and security, here and now, while super can seem invisible to people while they're still far away from retirement. And for that reason, paying out from super to a spouse is often preferred because it won't have an impact on your immediate financial position. But thanks to the super guarantee and contribution strategies from advisers, we're now seeing super balances that are close to equal in value to property held in the marriage. So it should be a front and centre issue for discussion in any settlement."
Alison agrees that people going through divorce are usually more focused on securing their finances in the present. "It's the future value of your super you need to bear in mind when you're weighing it up against other assets," says Alison. "Earnings within super are likely to be more tax-effective than income from other assets or investments, so it has the potential to grow faster. The difference is that you can't tap into that value any time you like. But by trading off super to stay in your home and preserve your current income level, you could be making a choice that has significant impact on your lifestyle in retirement and your choice of when to retire."
Can my ex claim some of my super (or vice versa)?
"Super is just like any other property of the marriage," says Donal "In a financial settlement, it's pooled with all the other assets a couple share and have contributed to their home and its contents, savings and investments. And as with these assets, both direct and indirect contributions are taken into account when determining how super is split. Your indirect contribution to your partner's super might come in the form of raising kids and managing the family home while they're earning and this may translate to a claim on their super."
"On the other hand, if you've been the main income earner and made significant, regular, contributions to your partner's super fund, then it could be argued you've already been dividing super between you in an equitable way. If the matter goes before a court, these are all things to be considered in deciding whether there will be a transfer of super from one partner to another."
Should I go to court to get my fair share?
"In my experience, people are generally quite worried about the cost of taking their financial settlement to court," says Alison. "So in most cases, they're quite motivated to come to an agreement between them on their super and other assets too. If their solution involves splitting super in an existing fund, then they will need to have a lawyer draw up a binding financial agreement to inform the fund trustee. In doing this, the legal representatives will certify that each party has been provided with appropriate legal advice in coming to this arrangement."
"But even if each partner has reached agreement, their financial split may not be in both their interests in years to come. Without comprehensive legal and financial advice, you may not have a clear view on the long-term impact of dividing assets in the marriage between you now."
Things to bear in mind with super and separation
Based on expert tips from Donal and Alison, we've put together six important things to be aware of when you're exploring options and making decisions about super and your financial settlement.
1. Check the value of super assets
Before making any decisions about how super will be retained or shared, take some time to get a full and up-to-date valuation of all super assets, whether they're held in an accumulation fund, defined benefit scheme or SMSF.
2. How long until you retire?
If you still have many years to go until retirement, you may be in a position to build up your super again through SG contributions. But by reducing your super balance now, you are sacrificing potential investment earnings on that amount. So you may wish to consider budgeting to make extra voluntary contributions going forward to compensate for this.
3. Mind the caps
There are annual caps on all your concessional (pre-tax) and non-concessional contributions into super both SG and voluntary payments go towards these caps. So if you're planning to catch-up on super after 'letting it go' in a financial settlement, you'll need to schedule future super payments with these caps in mind.
4. Review insurance and nominations
If your super splitting plans involve winding up or consolidating any of your current funds, check your personal insurance cover is still adequate for the needs of you and your family. As your family dynamic is changing, it's also a good time to review your super and insurance policy beneficiaries and update your nominations as needed. If you were to die following a separation, but without going through a legal divorce, the trustee of your super fund may pay the death benefit to your spouse, unless there is a current binding nomination naming your preferred beneficiary.
5. Impact on Centrelink entitlements
If you're approaching retirement, or retired already, super will likely play a far more significant role in a financial settlement. If your current income includes Centrelink payments, you'll need to consider how any distribution of super or other assets is going to affect your entitlements.
6. How will your super be invested?
You may choose to 'flag' super in an existing fund. This means the value of the fund will be shared between you and your ex-partner at a future time according to a binding financial agreement. And there may be other instances when joint super assets continue to be invested beyond a separation, in an SMSF for example. In cases like these, the two of you will also need to come to an agreement on making investing decisions to maximise the potential future value of your super assets.
Defined benefit schemes and SMSFs
If you or your ex-partner are defined benefit scheme members, or trustees of a Self Managed Super Fund, reaching agreement on what to do with your super, and acting on it, could be more complex. But no matter what super assets you have in your name or in what structure they are held, getting specific, expert and personalised advice on your financial settlement can make a significant difference to your financial security, both now and in the future.