How superannuation fares when a relationship breaks down

You don’t need to be married to potentially lose your super in a relationship break-up. Here’s why.

For many decades the biggest asset in divorce settlements was the family home, and it was often a source of heartache and conflict.

Today, because of almost 30 years of compulsory superannuation and an ageing population, superannuation nest eggs can be just as big for splitting couples.

Aussies are breaking up later in life – one in three divorcing couples today are aged over 50 – and it’s not unusual for super balances to top $500,000 or $1 million.

This gives people more financial flexibility when navigating a split, but there are some potential pitfalls to understand.

WHO GETS IT?

In a separation, superannuation is similar to other assets such as property or cash, and can be divided between partners through a court order or an agreement.

And it’s not just husbands or wives who may have to part with their super savings.

Australia’s family law applies to both married and de facto couples, and both heterosexual and same sex couples.

To be genuine de facto, they generally must have been living together for at least two years. Having a child together is also a criteria.

So if you’ve got a big super balance, breaking up with a long-term boyfriend or girlfriend could be financially damaging.

WHEN CAN THEY GET IT?

Leaving one partner the house and another the partner the superannuation is a strategy that some splitting couples use, but this may not be a smart move financially. That’s because even when super is split in a relationship breakdown, it remains preserved – locked away – until retirement.

De facto partners can be entitled to each other’s superannuation, too. Picture: iStock

This could be decades for younger couples, so the partner left with the house may enjoy a significant advantage and flexibility with their wealth.

Industry super fund UniSuper has good information about super and separation, and says couples can choose to defer the decision to split super as late as retirement.

This is through what’s called a flagging agreement, and it prevents super fund withdrawals until the flag has been lifted, it says. “A flagging agreement can only be lifted by a court order or flag lifting agreement.”

RETIREE BREAKUPS

The so-called grey divorce trend in Australia has been gathering steam for several years, and splits after age 50 tend to be messier because more assets are involved.

If retirees split after one or both of them have started an income stream – such as an account based pension – the Australian Taxation Office says a super agreement or court order can be used to split it.

“In most cases, the income stream would be commuted into a lump sum, due to the governing rules of the fund, and the non-member spouse paid their entitlement under the agreement or court order,” the ATO says.

“The fund would pay the rest to the member spouse either as either a lump sum or a reduced super income stream.” The ATO says there also can be tax consequences and transfer balance cap consequences.

It can be a dog’s breakfast, so getting good professional advice is vital.

STARTING AGAIN

The biggest problem with divorcing couples splitting their super and other assets is that both people become financially weakened.

I’ve heard plenty of experienced people say the golden rule for getting richer is to not get divorced.

Couples today seem too eager to split, perhaps not realising the impact it can have on their super, pensions, wealth and lifestyles.

Tom Cruise and Nicole Kidman starred in the thriller Eyes Wide Shut two years before they divorced in 2001. Splitting couples today should aim to keep their eyes wide open.

Originally published as How superannuation fares when a relationship breaks down