'Doesn't really align': The catch with choosing who inherits your super

For millions of Australians, deciding who gets their superannuation when they die may be more complicated than simply leaving instructions in a will.

The issue was thrust into the spotlight this week when research from consumer group, Super Consumers Australia, estimated more than 15.5 million Australians do not have a binding death benefit nomination, leaving them without certainty over who will receive their nest egg after their death.

Not all superannuation funds offer binding death benefit nominations.

And even where they are available, the rules around who can receive superannuation death benefits can create complications for families that don't fit the traditional spouse-and-children model.

Jessica Spence, director of policy at Super Consumers Australia, said many people mistakenly believe their super will automatically be transferred through their will.

"There are a lot of rules around who you can nominate, and they're a bit confusing, so a lot of people think that they've dealt with it when actually they haven't," she told SBS News.

Who can you nominate in a binding death benefit nomination?

Generally, a binding death benefit nomination can only name people who fall within certain categories, such as a spouse or child, or someone who meets the requirements of an interdependency relationship.

Spence said for people with family overseas, or relatives who don't meet the definition of a dependant, it complicates who they can actually nominate.

"You have to make a separate nomination to your super fund in order to tell your super fund where you want your super to go after you pass away," she said.

What if you can't nominate the person you want to?

Experts say another option is to nominate a legal personal representative, allowing the super to form part of the estate and be distributed in accordance with the person's will.

But this process can create particular complications for people whose closest family members live abroad, including in cases where they financially support parents, siblings or other relatives.

They also warn that simply nominating someone doesn't always guarantee they will receive your super.

Associate professor Natalie Silver from the University of Sydney researches superannuation as a form of inheritance.

Her research has examined what happens when a death benefit decision is challenged, and the extent to which a deceased person's wishes are ultimately reflected in the outcome.

"If it's non-binding, then there can be a challenge," Silver said.

She said that when a non-binding nomination is challenged, the relevant authority will often prioritise financial dependency when deciding where super goes and disregard the non-binding nomination.

That can leave people with little control over where their super goes when they die, particularly when the intended beneficiary doesn't meet the legal definition of a dependant.

Someone outside those categories can still receive the benefit through the person's estate, but that means the money is distributed according to their will rather than directly through the super fund.

When family and financial dependency don't align

The distinction matters for people whose idea of family doesn't neatly align with the legal definition of dependency.

Spence said the issue extends beyond migrant and transnational families.

She said the superannuation system was designed around a "traditional model" of the people someone would be expected to support.

"There are a lot of groups … including people who have come to Australia from other countries, or Indigenous Australians, who have different ideas and expectations and beliefs about who you should be supporting in your family and who constitute your family members," she said.

"The law doesn't really align with those other different views that people can have that are very important to them."

Spence said more flexibility is needed to reflect the diversity of Australian families.

Misha Schubert, CEO of the Super Members Council, said the issue warrants a broader review of whether the current rules reflect the way Australians live today.

"There is a discussion to be had about whether super death benefit settings adequately accommodate contemporary families, and whether rules around death benefit processing are fit for purpose," she told SBS News.

Why your binding nomination may have expired

Even people who have made a binding death benefit nomination should check whether it remains valid. The most common type of binding nomination can lapse after three years.

Silver says there are formal requirements that must be met for a nomination to remain binding, although some funds offer non-lapsing nominations.

Spence said many people assume that once they've nominated someone, their wishes are locked in permanently.

"When your nomination lapses … the super fund will decide where to pay it," she said.

The fund may take an expired nomination into account as an indication of the deceased person's wishes, but it is no longer binding.

Experts have warned that for those who deliberately make a nomination because their family circumstances were more complicated, failing to renew it could have significant consequences.

Schubert said there are "relatively straightforward changes" that could make the system easier for people to navigate.

"Raising public awareness of the importance of a binding nomination, simplifying processes, and updating rules to reflect contemporary family structures, all while maintaining safeguards, could help reduce uncertainty and improve the process by which super is passed to loved ones in the event of death," she said.

Your beneficiary could face a tax bill

Silver said that another layer of complexity is that tax legislation has a different definition of a dependant from superannuation law, meaning the person who receives a super death benefit may not receive the entire amount tax-free.

For tax purposes, spouses and certain interdependent partners are considered dependants, while children are generally only considered dependants if they are under 18.

Other beneficiaries who don't meet the tax definition of a dependant can face tax on the benefit.

Silver said the rate can be 15 per cent, depending on the circumstances and the components of the super benefit.

Experts say that distinction can have real financial consequences for families — a person may be able to receive someone's superannuation death benefit but still face a tax bill because they don't meet the definition of a dependant for tax purposes.

For people supporting family members overseas, or whose relationships fall outside the traditional definition of family, the tax treatment can affect how much of the superannuation death benefit the beneficiary ultimately receives.

Super is increasingly becoming an inheritance

Silver said the issue is becoming increasingly important because superannuation is no longer simply a vehicle people use to fund their retirement.

She said people are increasingly dying with substantial super balances intact, meaning super is becoming a significant part of inheritance.

That raises questions about whether a system originally designed around retirement savings is adequately equipped to deal with the increasingly diverse ways Australians structure their families and financial responsibilities.

Schubert said the changing role of superannuation and varying dynamics of modern Australian families make a review of the rules timely.

"This could include a review of state and federal laws around death benefit allocations," she said.

What happens to your super if you don't nominate anyone?

Spence said one misconception she hears often is that if someone dies without a binding nomination, their superannuation will simply be taken by the government.

She said the super fund trustee will instead assess the people in the deceased person's life who may be eligible to receive the benefit and make a decision based on the circumstances.

But Spence said that process can take longer, and there is a risk that the money may go to someone the deceased did not intend.

For grieving families who may need the money to cover funeral costs or everyday living expenses, that delay can add another layer of stress.

Super Consumers Australia is calling for mandatory service standards around death-benefit claims, including clearer obligations on funds to remind members about making nominations and easier processes for doing so.

The organisation also wants standards around how quickly funds process death-benefit claims.

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