Don't let divorce damage your retirement income plans

If you’re an older Australian woman, the news on retirement income is often bittersweet.

First published on Starts at 60

Although we are fortunate to have a relatively generous taxpayer-funded pension, the 26 years since compulsory superannuation was introduced haven’t produced a big retirement income boost for many women.

That’s because women are more likely to have taken breaks from the workforce to care for children or elderly parents, while the time they spent in work saw them receive lower pay than men for doing the same job. As a result, at retirement a woman typically has a super balance worth about half that of a man the same age, according to the Association of Superannuation Funds of Australia (ASFA).[1]

All of this means that if you separate or divorce in the final few years of your working life and your expectation of relying in part on your spouse’s retirement income disappears, it can really throw a spanner in your plans. But it’s not all doom and gloom! Even if you find yourself unexpectedly single in the lead-up to retirement, it’s still possible to turn your financial fortunes around.

Why super’s different in divorce

When a couple separates, their assets are divided up either by mutual agreement or by a direction of the Family Court.[2]

Although superannuation balances are considered part of the marriage’s asset pool, the way this money is treated is a little different. Because super is designed to support your retirement and usually can’t be touched until then, it’s not possible to just cash it out and divvy up the money.

Under the law, couples can agree on how their super balances should be divided, taking into account the division of other assets in the marital pool and the contributions both people made to the relationship in financial and non-financial ways. Before making any such agreement with your former partner, though, it’s advisable to consult a family law practitioner to ensure your contribution to the family finances is fairly reflected in the split.

The other option is to leave the division for the Family Court to decide. The Family Court sets out in detail how super balances can be split.[3]

It’s worth noting, though, that even if super monies are transferred from one person’s fund to another, it’s still subject to preservation rules, which means it stays in your super fund account until you retire.

If you or your ex have a self-managed super fund (SMSF) or are a member of a defined benefit fund (these are usually held by current or former public servants), things get more complicated and, again, it’s important to seek legal advice specific to your circumstances.

There’s another way super’s different to most assets, and that’s how it’s treated if you die or become disabled.

Super and your estate

If you’re on top of your estate planning, you’ll have an up-to-date will. That way, you’ve got the comfort of knowing your wishes will be met when you pass away.

Again, with superannuation, it’s different. That’s because the trustee of the superannuation fund, not your will, decides where your money goes. If you’ve given the trustee instructions – usually by written notification to pay your benefit to a dependant or your estate –  the trustee will generally comply with those wishes.

But if your circumstances change after making that nomination because, for example, you separate or divorce, the trustee will still be bound by your instructions. That doesn’t just include the balance of your fund. If you’ve got insurance attached to your super account, such as death or disability cover, the payout could be substantial.

If you haven’t changed your nomination, your super savings and your insurance benefit could be paid to your former partner, possibly against your wishes.

Carly Middleton, an accredited family law specialist and partner at Barkus Doolan, says that’s why it’s key to update such details when you separate or divorce.

“I always advise parties to get new binding death nominations drawn up, and an updated will,” she says. “If you’ve got life insurance, you’ll also need consider changing your beneficiaries.”

Have I got enough?

After you’ve finalised a property settlement and arranged a split of your superannuation, you might be worried that you don’t have enough money to retire on.

Fortunately, help is at hand. The ASFA regularly publishes the annual income needed by most Australians to fund a modest or comfortable retirement.[4] ASFA’s research suggests a single 65-year-old will need $27,595 a year to pay for a modest retirement lifestyle, rising to $43,200 for a more comfortable retirement (in both cases ASFA assumes you own your home).

To get an idea whether your super balance is enough to generate that sort of income, the Australian Securities and Investments Commission (ASIC) has a retirement planner that can calculate whether you’re on track.[5]

And if you don’t think you’ve got enough to retire, don’t panic, because you’ve got options, even if you aren’t earning a lot.

Boosting your super

Even if you’re only planning to spend few more years in the workforce, superannuation is your friend. Despite having a reputation for being complicated (and the fact the government keeps moving the goalposts!), super is potentially one of the most tax-effective way to put money away for your retirement.

There’s a range of incentives to help you maximise your final payment and most of them offer tax benefits. Depending on your circumstances, the Australian Taxation Office advises that you could benefit from:[6]

  • Claiming a tax deduction for making personal contributions
  • Making a salary sacrifice arrangement with your employer, which could reduce your taxable income
  • The government co-contribution scheme for low-to-middle-income earners
  • Making a lump sum contribution.

If you’ve received a property settlement, you may even be able to take advantage of the new rules that allow you downsize your home and contribute a one-off lump sum of up to $300,000 to your super balance.[7]

Your financial adviser or super fund can help you decide the best course of action.

Your vital next move

Even if you’ve had a setback such as a separation or divorce, there’s still time to put yourself in a better financial position, but it’s vital to start planning for your future right now.

It’s also important to take stock of your position on a regular basis, whether you’re still working towards building a nest egg or you’ve already got a substantial super balance. If you’ve got a financial adviser, perhaps ask for an annual financial health check. Or make sure you get regular updates from your super fund and read them carefully.

If you’ve come late to the superannuation scene and you’re not likely to benefit from a big retirement payout, don’t forget that the Age Pension is still the cornerstone of our retirement system.

The majority of retirees benefit from at least a part-pension (and the associated benefits) and given the number of Baby Boomers retiring over the next few years, it would take a brave government to take that away!

Speak to your financial adviser or learn more with BT 

[1] https://www.superannuation.asn.au/ArticleDocuments/359/1710_Superannuation_account_balances_by_age_and_gender.pdf.aspx?Embed=Y
[2] https://startsat60.com/money/your-home-and-divorce-how-to-handle-your-biggest-asset-in-a-relationship-split
[3] http://www.familycourt.gov.au/wps/wcm/connect/fcoaweb/family-law-matters/property-and-finance/superannuation/
[4] https://www.superannuation.asn.au/resources/retirement-standard
[5] https://www.moneysmart.gov.au/tools-and-resources/calculators-and-apps/retirement-planner
[6] https://www.ato.gov.au/Individuals/Super/Growing-your-super/
[7] https://www.ato.gov.au/General/New-legislation/In-detail/Super/Contributing-the-proceeds-of-downsizing-to-superannuation/

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Article prepared by Starts at 60, June 2019 and reused by BT with permission.  BT is a part of Westpac Banking Corporation ABN 33 007 457 14 AFSL and Australian Credit Licence 233714 (Westpac). Information is current as at September 2019.

The information in this publication is general information and factual only and it should not be considered a comprehensive statement on any matter or relied upon as such. It does not constitute any recommendation or financial product advice. The information has been prepared without taking into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. The information provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. 

Superannuation is a means of saving for retirement, which is, in part, compulsory. The government has placed restrictions on when you can access your investments held in superannuation. The Government has set caps on the amount of money that you can add to your superannuation each year and over your lifetime on both a concessional and non-concessional tax basis.  There will be tax consequences if you breach these caps.  For more detail, speak with a financial adviser or registered tax agent or visit the ATO website.

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