Natasha, who is 37, and her husband Tyrone, who is 42, have been members of a superannuationfund for many years. They have two children under 18 years old. Unfortunately, Tyrone is tragicallykilled in a road accident. The superannuation fund permits death benefits to be paid as a lump sum or asan income stream. Provide your advice to Natasha about the advantages and disadvantages of her takinga lump sum compared to an income stream and the taxation consequences of each option
Question
Natasha, who is 37, and her husband Tyrone, who is 42, have been members of a superannuationfund for many years. They have two children under 18 years old. Unfortunately, Tyrone is tragicallykilled in a road accident. The superannuation fund permits death benefits to be paid as a lump sum or asan income stream. Provide your advice to Natasha about the advantages and disadvantages of her takinga lump sum compared to an income stream and the taxation consequences of each option
Solution
Taking a lump sum or an income stream from a superannuation fund after the death of a spouse both have their advantages and disadvantages.
Advantages of a Lump Sum:
- Immediate Access: Natasha will have immediate access to the funds which can be used to pay off any immediate debts or expenses.
- Investment Opportunities: She can invest the money elsewhere where it might earn a higher return.
Disadvantages of a Lump Sum:
- Mismanagement Risk: There is a risk that the money might be mismanaged or spent too quickly without a proper financial plan.
- Tax Implications: Depending on the size of the lump sum and other income, Natasha might end up in a higher tax bracket.
Advantages of an Income Stream:
- Regular Income: This provides a regular income which can help cover living expenses and provide financial stability.
- Tax Benefits: If Natasha is over the age of 60, the income stream is tax-free. If she is under 60, a portion of the income stream may be tax-free and the rest is taxed at her marginal rate less a 15% tax offset.
Disadvantages of an Income Stream:
- Access to Funds: Unlike a lump sum, Natasha won't have immediate access to all the funds. This could be a problem if she has large, immediate expenses.
- Investment Risk: The income stream is subject to investment risk. If the investments perform poorly, the income stream could decrease.
In terms of taxation, lump sum death benefits paid to a dependant (like Natasha) are generally tax-free. However, if the lump sum includes an untaxed element (such as life insurance payouts), that portion may be taxed.
For an income stream, if Natasha is under 60 years old, she will pay tax on some of the income, but will receive a 15% tax offset. If she is 60 or over, the income stream is tax-free.
It's important for Natasha to consult with a financial advisor to understand which option is best for her personal situation.
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