On death, the balance of a member’s account is usually paid to a designated beneficiary as a lump sum.
For an accumulation fund, the amount payable is typically the contributions made for or by the member plus some other (usually insured) amount which might be: a fixed dollar amount (e.g. $50,000), an amount which depends on age, a percentage of salary for each year of future service, a multiple of salary, etc.
For a defined benefit fund, a common death benefit is the prospective normal retirement benefit (the retirement benefit the member would have received if he/she had been employed until normal retirement date, receiving the same salary up to retirement).
Issues upon Death of a Member:
- If a member dies prior to commencing a pension, the balance of that member’s superannuation benefit is to be paid in cash to either the binding death benefit nominee or to the beneficiaries of the deceased’s estate in accordance with the will. A problem can arise in this case when the Superannuation Fund does not have sufficient cash to fund the payout of the deceased’s interest, hence assets must be sold and tax will be payable by the Superannuation Fund on any gains made.
- If a member dies after a pension has commenced and there is no reversionary beneficiary nominated, the balance of the member’s account is transferred back to accumulation phase and then paid out to the beneficiaries of the deceased’s estate in accordance with the will. A problem can arise in this case when the Superannuation Fund does not have sufficient cash to fund the payout of the deceased’s interest, assets would need to be sold and tax will be payable by the Superannuation Fund on any gains made.