In Family Law, superannuation is considered an asset of a relationship, just like a house or savings and needs to be taken into account in considering a fair outcome for the parties.
Superannuation is a vital asset in separation settlements
Superannuation is often one of the most valuable, if not the single most valuable, asset owned by couples going through separation. It is now not uncommon for people to retire with superannuation balances well over a million dollars. However, superannuation is often overlooked as an asset available for division in a property settlement and those going through a separation are sometimes reluctant to seek some of their former partner’s superannuation. Additionally, in negotiations between parties, parties sometimes go further than making a “concession” about superannuation, but just ignore it altogether.
What happens to superannuation in a divorce or separation?
In Family Law, superannuation is considered an asset of a relationship, just like a house or savings and needs to be taken into account in considering a fair outcome for the parties. To highlight this, in 2002, laws were introduced allowing superannuation to be divided following the breakdown of a relationship. This ‘split’ can be done either through an agreement or through a Court Order and effectively results in one party (usually the one with the higher super balance) paying some of their superannuation to the other.
Is it worth splitting the superannuation after a relationship breakdown?
Thanks to the magic of compounding interest, super can become very valuable over time. If you use a general superannuation fund, the money you put into your super account is invested and you earn compounding interest on the money you put in. This means that you earn interest on not only the money you put in, but also on the interest you have already earned. The longer you leave super in your super account, the more benefit you will get from compounding interest and the more valuable the account will become. Over time, compounding interest can see a fairly humble super balance grow into a really healthy amount of money.
What happens if there are unequal superannuation balances after separation?
Often, there is a significant disparity in the superannuation balance of parties following the breakdown of a relationship. This is particularly so in households with children; the primary carer often earns less than the other parent, is more likely to work part-time and is more likely to have career interruptions because of caring responsibilities. Those who enter the workforce later in life after fulfilling caring roles find it particularly hard to accumulate significant amounts in superannuation as they do not benefit from the long-term compounding effect of interest on their superannuation balances. This means that a primary caregiver is likely to retire with significantly less superannuation than their partner and, in some cases, the prospect of leaving with no retirement savings may dissuade someone from leaving an abusive relationship.
Do you have to split superannuation in a divorce?
You and your former partner can choose to defer the decision to split super to another time, or you could choose to leave yours and their super untouched altogether.
The problem with not splitting superannuation following a separation or divorce
In in-tact relationships, this may not matter; often retirement savings are shared between couples and they both have the benefit of each other’s superannuation savings. However, studies show that those who are single in retirement are likely to struggle to fund themselves, often need to rent into retirement or return to employment in their old age, and are more likely to rely on the aged care pension as their main source of retirement income. This cannot be fair if your superannuation balance is only low because of your role within a family, and herein lies the problem with parties not seeking to split super following a separation.
What are you entitled to in a divorce or separation in Australia?
Seeking advice on this issue is important even where there are no other assets of significant value to be dealt with (for example a home, savings shareholdings etc.). Although parties in this situation are potentially more unlikely to obtain legal advice about a property settlement and seek superannuation that they may otherwise be entitled to, superannuation is going to be even more valuable to them into the future as superannuation may be their sole asset at retirement.
Let’s look at the practical reality of not seeking a superannuation split
Still not convinced about whether it’s worth the time and hassle in going through the process of a super split? Brian Bendzulla from NetActuary has given us a couple of illustrative examples (applying some sensible assumptions1 but without adjusting for inflation) of the practical reality of not seeking a super split:
Example 1: divorce and superannuation
- The Wife and Husband are both aged 35 at separation.
- The Wife was working during the relationship but has taken time out of her career caring for children. She has now returned to work, earning $80,000 per annum. The Wife has superannuation balance at separation of $42,000.
- During the relationship, the Husband was consistently employed full-time. He earns $120,000 and his superannuation balance at separation is $110,000.
- Both the Husband and Wife retire at 70.
If the parties at separation were to equalise their super, this would see the Wife receiving a super split in the amount of $34,000. This may not seem like a significant sum, but if the Wife were to forego this super split and did not have the benefit of those funds for the 35 years until she retires, this could actually cost her something like $257,047 in foregone superannuation at retirement!
Example 2: divorce and superannuation
- The Wife and Husband are both aged 50 years at separation.
- The Wife has been a high income earner throughout the relationship. At separation, she earns $250,000 and has a superannuation balance of $450,000.
- The Husband has had to take a step back in his career to support the Wife’s career and regular travels. At separation, he earns $90,000 and has a super balance of $150,000.
- Both the Husband and Wife retire at 67.
Again, if the parties were to equalise their super at separation, this would see the Husband with a superannuation split of $150,000.00. If he foregoes this split, this may actually cost him something like $400,689 at retirement!
In summary
In Australian Family Law, superannuation is considered an asset during divorce or separation and can be divided between partners. This division can be done through an agreement or court order. Superannuation can become significant over time due to compounding interest, and ignoring it in settlements can result in substantial financial loss for the lower-earning partner. It is especially important for primary caregivers, who often have lower super balances, to consider splitting superannuation to ensure financial stability in retirement.
Talk to us today
At elringtons, we are offering a low, fixed-fee of $1,500 plus GST and disbursements for those seeking Consent Orders only in relation to superannuation. Any questions? Please book an appointment with us to discuss further!
- Assumptions being – rate of earnings 7%pa, rate of inflation 2.5% pa, rate of tax pre retirement 15%, rate of tax post retirement 0%, life expectancy in affordance with the Australian Life Table 2015-17 with 25 years mortality improvement factors ↩︎
