Protecting Your Retirement After Divorce
Divorce can be tough, especially when it comes to finances. In Australia, superannuation (super) is often one of the biggest assets a couple builds during their relationship, but it’s not always accumulated equally. One partner may earn and contribute more to the combined superannuation pool whilst the other may have taken on more of a homemaker role. During divorce and the separation process, it's important to know how super is handled and how to protect your retirement savings.
Understanding Superannuation in Divorce
Superannuation is considered under the Family Law Act 1975 and can be divided between spouses during a divorce or separation. However, unlike other assets, super is subject to strict rules and regulations regarding when and how it can be accessed. These complexities can make dividing super during a divorce a unique challenge compared to dividing other assets like the family home or investments.
How Superannuation is Divided
Dividing superannuation after separation can occur in one of two ways:
Superannuation Splitting: This is the most common method where a court or a superannuation agreement between the parties dictates how much of one spouse’s super is to be transferred to the other. The split does not mean cashing out super; instead, the specified amount is transferred to the other spouse's super account and remains subject to usual superannuation rules and regulations.
Deferred Split: In some cases, particularly with defined benefit schemes or self-managed super funds (SMSFs), a deferred split may occur, meaning the division takes place at a later stage.
How Superannuation Agreements Work
During divorce proceedings, couples can agree on how to split their superannuation interests. This can be done through a superannuation agreement which is a formal, legally binding document that outlines how super will be divided. Such agreements can be reached outside of court, provided that both parties first obtain independent legal advice.
Super splits can also be achieved through a court order made by consent or if an agreement cannot be reached, the court can dictate how super interests are to be divided. When determining what is an appropriate division of super interests, the court typically considers several factors, including the length of the marriage, each party’s financial contributions, and future needs such as health and income-earning capacity.
Valuing Superannuation
To divide superannuation, an accurate valuation of each party’s super interest is essential. The value of a superannuation interest is not always straightforward, especially in defined benefit funds or SMSFs. The valuation process is generally outlined in Family Law Superannuation Regulations and varies depending on the type of fund the interest is held in.
Super fund members can request a valuation by applying to their superannuation fund. It’s crucial to engage legal and financial advice at this stage to ensure a fair and equitable division.
Tax Implications of Splitting Super
Another significant consideration that needs to be made when dealing with superannuation in divorce is its taxation treatment. Superannuation splitting does not trigger an immediate tax liability, as the super remains in the fund and is subject to the usual superannuation tax rules. However, when the super is eventually withdrawn, it will be taxed according to the applicable rates at that time, depending on factors such as the individual’s age and the type of super contributions. If you have any questions about the taxation implications of your super and the splitting of it, it is crucial to obtain independent financial advice as to the tax implications that can impact you.
Protecting Your Superannuation After Divorce
Divorce can leave individuals vulnerable, especially when it comes to long-term financial security. While there are probably other more immediate considerations when it comes to property settlements in a divorce or separation, it’s critically important not to leave superannuation ignored, because it can mean the difference to a comfortable retirement.
1. Seek Legal and Financial Advice Early
It’s crucial to consult with both a family lawyer and a financial advisor early in the divorce process. This will help you understand your entitlements and the best ways to protect your superannuation. A lawyer can also assist in drafting a superannuation agreement or obtaining court orders if necessary.
2. Review Your Super Fund
After a divorce, it’s a good time to review your super fund and make adjustments where necessary. Consider consolidating multiple funds, adjusting your investment strategy, and reviewing any insurance policies linked to your superannuation. Some individuals may also wish to nominate new beneficiaries in case their former spouse was named as a beneficiary.
3. Understand Your Future Needs
When negotiating a property settlement, it’s essential to consider your future needs, especially if you are nearing retirement. For example, if you have little time left to accumulate superannuation before retirement, it may be in your best interest to focus on retaining assets outside of super, such as property or cash investments, to ensure you have access to funds when needed. Again, while you should be talking to a lawyer regarding the legal implications of separation and super, it is also critical that you seek qualified financial advice early to assist you with working out an arrangement that is best suited to your individual circumstances.
What Happens If Separation Comes Later?
Divorce can be particularly challenging for older Australians who have had fewer working years to accumulate superannuation and are closer to retirement age. For these individuals, dividing super can have a more significant impact on their financial well-being in retirement. In these situations, seeking financial advice on how to maximise the remaining superannuation and other assets becomes critical.
Protecting your retirement savings should be one of the most critical priorities when navigating a separation, and certainly your lawyers will have that top of mind. It does, after all, represent a working lifetime and collaboration with your former partner. Untangling that as part of your overall property settlements can become an emotional and financial challenge, which is why it’s so important to seek professional help early on.
