When a couple is going through separation, it is common for them to think about the property to be considered in a financial settlement. One type of asset which is often initially overlooked is the superannuation benefits of each party and whether a superannuation splitting order or agreement should be made.
In this article, we explore how superannuation may be split following a separation and how it is considered in the context of family law property settlements.
How superannuation is treated in the breakdown of marriages and de facto relationships
Superannuation can be divided between separated couples irrespective of whether they were married or in a de facto relationship. If the couple were married, it is not necessary to be divorced before the superannuation can be divided as part of a property settlement.
As with any property settlement, there are no hard and fast rules that apply in relation to how, or even if, the superannuation is to be divided.
Superannuation is treated in much the same way as all other assets that are taken into account in a settlement. The overriding consideration is reaching a settlement is that is just and equitable. Therefore, the whole asset pool is considered for division, and superannuation is treated as a type of asset even if the superannuation fund member has not retired. The process of dividing superannuation is known as superannuation splitting. However, there is no automatic right to a superannuation split, and even if there is an agreement to a split, it is not an automatic equal division. It is very much a discretionary aspect of each individual property settlement.
While superannuation benefits are treated as a type of asset, determining the value of the benefit can be slightly more complicated than valuing other assets such as real estate. Superannuation is effectively an asset held in trust by the trustee of the fund until conditions of release are satisfied by the member. Further, superannuation that will not be able to be accessed for many years until retirement may not have the same inherent benefit to a person as the same value of readily available assets. For example $500,000 in a superannuation benefit which will not become available for say 20 years might not be considered to be the same value to a party as $500,000 in cash, available now.
Do you have to split superannuation as part of a settlement?
No, it is not a given that the superannuation entitlements will be split. Depending on the couple, one party might prefer to largely retain their superannuation entitlements intact and allow the other person to largely retain the non-superannuation assets, such as the family home.
A factor that often comes into play is how close the parties are to retirement age. If they are close to retirement, one party might wish to keep their superannuation benefit intact because it will generate a good income stream for that party after retirement and the party retaining the superannuation may be prepared to receive comparatively less e by way of non-superannuation assets.
As with all assets in a property settlement, the parties have a great deal of flexibility in negotiating what works best for them. The important thing to do when compiling a list of assets and liabilities at the start of this process is to start looking at superannuation as well. Each party should know what the other has by way of current superannuation entitlements and it is often important to find out what each owned by way of superannuation benefits at the beginning of the relationship (if significant ) to determine what superannuation was accumulated during the relationship.
Simplified access to current superannuation balances is available via the MyGov website. So, if a party has forgotten about a superfund, or has been a member of a number of super funds during a relationship, they can now login into their MyGov account linked to the ATO and check their balances. This information can be exchanged between the parties negotiating a settlement and overcomes concerns about forgotten funds.
If a superannuation benefit has associated pension entitlements, there are complex legislative provisions which specify how that benefit is to be valued for family law settlement purposes, as the family law value is different to the value the fund trustee would attribute to that benefit. The family law value is a valuation as at the date specified of the member’s benefit which takes into account the average salary of the member, length of service and age of the member. It is not a projection of the value of the benefit at retirement age. Pension based funds typically apply to parties who work in the public sector or in the military. The family law valuation should be obtained before parties try to reach an agreement as to what an appropriate division of the property pool may be. Family lawyers can assist in this process.
It is important to know that when a superannuation split is decided on, the amount allocated to one partner is not received as cash. Instead, this amount is usually rolled into the superannuation fund of the receiving party. It remains in the new fund until that party retires or meets other conditions of release. When pension based funds are split, the fund usually creates a separate interest in that fund for the non-member and the non-member becomes an associate member of the fund.
As family lawyers, we help our clients understand the implications of these splits so a just and equitable settlement can be reached.
How Self-Managed Superannuation is treated in a property settlement
When self-managed superannuation funds are involved in a property settlement it is important to engage with the client’s superfund accountant at an early stage. This is because the superfund accountant will need to ensure that the member benefits and financial statements of the fund are brought up to date before a splitting order or agreement is made and this may require updated valuations of the assets of the fund.
If there is a self-managed superfund, often both parties will have a benefit within the fund. Establishing a new self-managed fund to receive the split benefit (known as the transferable benefit) may not be cost-effective and it may be preferable to have the transferable benefit and the pre-existing member benefit rolled into a retail fund. Parties with a self-managed fund benefit should speak to a financial planner and accountant before reaching an agreement to split self-managed superannuation. Fees associated with compliance and managing a self-managed super fund can be costly, depending on the nature of investment within the fund.
Superannuation splitting can take time
When a separated couple formalises an agreement to divide their property, the agreement is usually documented by way of a Consent Order made by the Federal Circuit and Family Court of Australia. Before the Court will make a super splitting order, it requires proof that the trustee of the super fund has been provided a proposed splitting order. The superannuation fund trustee then has the right to review the order to ensure the order complies with the fund rules and legislation and can object to the order if it does not comply. This can slow down the process of reaching a final agreement.
We advise our clients to start thinking about their superannuation at an early stage of negotiations and try to formulate some ideas on what agreement they might wish to reach. This is particularly relevant for people who have superannuation funds that have a pension attached to them due to the delay in obtaining family law valuations and having the superannuation order reviewed by the trustee.
What superannuation division will be best for you?
Negotiations in relation to superannuation splitting are highly dependent on each party’s circumstances to ensure a just and equitable outcome. Any superannuation split should be considered in the wider context of the overall division of the property pool.
It is also important to note that you do not have to split superannuation in a property settlement if you choose not to. Both parties might be content to leave them as they stand. This is quite common if parties have similar incomes and have both built up their superannuation to a similar level.
Consulting an experienced family lawyer at the start of the separation process can help to guide you as to whether a superannuation split could be right for you. We will be able to give you advice specific to your goals and your individual circumstances.
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DDCS Lawyers specialise in providing advice about property settlements. Our expert team can help guide you through the process and provide you clarity about how you can ensure the decision you make now will be beneficial for you in the longer-term. To seek initial assistance, contact our team on (02) 6212 7600 to book a consultation.