The superannuation Million-dollar dilemma

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MEDIA RELEASE A large lump sum payout from superannuation might sound good to most people, but there are circumstances when it is a serious problem rather than a welcome windfall, says Michael Hutton, wealth management partner at HLB Mann Judd Sydney.

In particular, it can be a problem for self-managed superannuation fund trustees and members, which tend to have higher member balances, he says.

“Because of the government’s decision to place caps on how much money can be held in pension accounts in superannuation, people are finding themselves in an unprecedented and unexpected situation where they suddenly need to withdraw a large amount from a super fund, and find another home for it, all in a short time frame,” Mr Hutton says.

Using the example of a couple sharing an SMSF, Mr Hutton points out that if one person passes away, the SMSF can only retain the amount that can be taken as a pension by the remaining member, which is capped at $1.6 million. Anything above this in the deceased’s member account will need to be paid out of the fund as a lump sum death benefit.

“The remaining SMSF member may struggle with this. It can be a big amount of money, and a big decision, to make quickly.”

Mr Hutton said it may sound like a strange problem to have but for many people, it can cause all sorts of difficulties.

“To start with, they are making decisions about significant amounts of money at a time when they are grieving and emotional.

“Making a sensible, long-term decision about what to do with this money can be very difficult at the best of times – and this certainly won’t be the best of times.

“Furthermore, they may never have dealt with this kind of issue before. Whether it’s because they have never received a lump sum of any kind, or whether it’s because they weren’t the person in the relationship who dealt with financial matters, this could be something completely unfamiliar and they may not have the knowledge or the skills to manage it.

“Taking money out of the established, well-regulated superannuation environment can be daunting.

“Another consideration that we are unfortunately having to think more and more about, is the issue of elder abuse.

“Receiving a significant amount of money, at a time of emotional vulnerability, could attract unscrupulous people – including family members – to try and take financial advantage.

“Sadly, this is becoming an all too common occurrence,” Mr Hutton said.

He says that as part of people’s retirement and estate planning considerations, they should think about what they would do if one person dies and the surviving partner needs to manage a significant payout from a superannuation fund.

“It may mean working out a strategy where the surviving partner knows in advance how they will invest any money they receive, so they don’t need to make decisions when it actually happens – for instance, dividing it equally between any existing investments in managed funds.

“Alternatively, they may decide to use the money to help out children or grandchildren – but this should be done as part of a considered plan that takes all financial aspects and requirements into account, not as a spur-of-the-moment decision at a time of emotional stress,” Mr Hutton said.