Divorce and Superannuation. The ins and outs…

The most common questions asked when it comes to divorce and Superannuation are;

  1. My Ex has agreed to pay me a share of his Superannuation as part of our financial settlement. Does it have to be paid into Superannuation or can I take it in another form?
  2. I am not clear on how Superannuation is treated when a divorce occurs.

Following our divorce, does my share of my Ex’s Superannuation have to be paid into Superannuation or can I take this as cash?

The easiest way to understand divorce and Superannuation is to first clearly understand what Superannuation is. Whilst complex, Superannuation is there for one reason… To provide access to benefits once you have retired.  Superannuation cannot be accessed prior to retirement. Naturally, this concept isn’t that simple either.  In essence, Superannuation must remain in the Superannuation system until such time as the individual who holds the entitlement has met a condition of release. At this time, the individual may then access the benefits accrued either as a lump sum or a Pension (or combination of both).

Conditions of release include;

  • Retirement after you have reached your preservation age or on turning 65,
  • Starting a transition to retirement pension income stream (After turning 55+),
  • In some cases, a Superannuation trustee may release funds in times of extreme financial hardship,
  • Following a total and permanent disability diagnosis (commonly off work for 6 months or more with no likelihood of returning to the workforce and same confirmed by medical specialists).

I am not clear on how Superannuation is treated when a divorce occurs.

The second question about what happens to Superannuation following a divorce is more complex.

The family law act 1975 and the Superannuation Industry (Supervision) Act 1993 (SISA) allows for an interest in a Superannuation benefit or payment to be divided or split between two parties following an agreement (or court order) when a relationship has broken down.

Following the breakdown of a relationship (Including same sex) the parties involved have three choices when considering what happens to their Superannuation benefits.

  1. Split of a Superannuation interest into 2 via either a payment split or an interest split
    1. A payment split (Assuming a condition of release has been met) means a Superannuation benefit can be paid out.
    2. An interest split is the more common approach when managing Divorce and Superannuation entitlements.  In this case, both individuals receive an interest in the Superannuation.
      1. The spouse receiving the Superannuation benefit can either leave the Superannuation funds in the same fund (Very rare other than in an SMSF or
      2. Transfer the Superannuation benefits across to either a new fund or one in their name in existence or
  2. Flag the Superannuation benefit and choose to defer any decisions until a later date.
    1. The flagging of Superannuation benefit allows both individuals to protect their respective interest while waiting for a key event to occur at some point in the future such as an Impending retirement, valuation of an asset in SMSF such as a property owned by the fund or the sale of an asset at a more favourable time etc.
    2. Once the key event has taken place, the trustee of the Superannuation arrangement will then know the exact value of the asset and be in a position to then deal with the splitting of the asset/s
  3. Consider the value of Superannuation but leave it as is.
    1. Superannuation used to be considered a resource rather than an asset of a personal relationship.

      This means couples can take Superannuation into account when working out their financial position without actually touching the Superannuation benefits. In other words, one spouse may receive additional benefit from another asset such as a greater share of property or cash.

Generally speaking, the most common approach to dealing with Divorce and Superannuation benefit is to agree to an interest split. The following is a summary of the steps required to implement an interest split for a Superannuation benefit.

  1. Establish the value of the funds in question by seeking a valuation from your spouses Superannuation fund itself,
  2. Agree either mutually or via a court order (Where you cannot reach agreement) regarding the interest split
  3. Provide a copy of the agreement to the trustees of the Superannuation arrangement
  4. Complete the split of the Superannuation benefits

We strongly recommend talking to a family lawyer about these matters as they are complex. Superannuation laws require each party to receive independent advice prior to signing an agreement, if that agreement is to be considered binding.

Please note where both you and your ex are members/trustees of an SMSF, the steps are more complex. You should consider seeking advice from a specialist SMSF Financial planner.

 LifeTime Financial Group are specialist (holding appropriate accreditations) advisors who are ideally positioned to assist you.

Would you like to discuss your personal position further with one of our highly qualified financial planners? Why not call us today on 03 9596-7733. There is no cost or obligation for our initial conversation/meeting.

Written by Anthony Stedman of LifeTime Financial Group. A leading privately owned Melbourne based Financial Planning practice

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