Many Australians spend decades building their superannuation balance, only to face a completely new challenge when they receive a large inheritance. Recently, we worked with a couple approaching retirement who unexpectedly inherited $1.7 million in cash. They already had approximately $900,000 in superannuation, and while they believed they had enough money to retire comfortably, they had no clear strategy for managing it.
If you find yourself in this situation, the right advice matters if you want to avoid costly mistakes.
STRUCTURING INHERITANCE EFFECTIVELY
An inheritance doesn't automatically need to sit in a bank account or be tipped straight into super. The right structure depends on the couple's age, work status, and long-term goals, but the main levers available to Australians are:
Superannuation contributions - Getting money into the concessionally taxed super environment is usually attractive, but contribution caps constrain it. The concessional (before-tax) cap and non-concessional (after-tax) cap limit how much can go in each year. However, the bring-forward rule can allow up to three years' worth of non-concessional contributions in a single year, depending on total super balance and age. Contribution eligibility also depends on the work test for those aged 67–74. Recontribution strategies - For couples wanting to manage the tax treatment of super for their beneficiaries, withdrawing and re-contributing funds can change the taxable/tax-free components of a super balance. Holding funds outside super - Money that can't yet go into super, or that needs to remain liquid, can be held in personal names, jointly, or via structures like a family trust. Each structure has different tax, asset protection, and estate planning consequences. Timing - Because contribution caps are annual, spreading contributions across financial years can allow more of the inheritance to reach the concessional super environment over time, rather than triggering excess contributions tax. Depending on unique circumstances, a common strategy involves a multi-year contribution plan that works within people’s caps, combined with a separate investment structure for funds that can’t yet be moved into super.
UNDERSTANDING THE TAX IMPLICATIONS
A common misconception is that inheritances themselves are taxed in Australia. They aren't. Australia has no inheritance or estate tax. However, tax can still arise in a few important ways.
Investment earnings - Once the inheritance is invested (whether inside or outside super), any interest, dividends, or capital gains it generates are taxable in the usual way, at the applicable personal, trust, or super tax rates. Inherited assets other than cash - If an inheritance includes property, shares, or other assets rather than cash, capital gains tax (CGT) may apply when those assets are eventually sold, and the cost base rules can be complex depending on when the deceased acquired the asset. Super contributions tax - Concessional contributions are taxed at 15% on entry (or 30% for high income earners), which is usually still more favourable than marginal tax rates, but it's a cost to factor into the contribution strategy. Centrelink and means-tested implications - A large inheritance can affect eligibility for the Age Pension or other government entitlements, since it counts under both the income and assets tests.
GENERATING A RELIABLE RETIREMENT INCOME
Simply having a large balance isn't the same as having a reliable income stream. Converting existing super and inheritance into income that will last through retirement requires planning that will ensure a secure future. Considerations include:
Account-based pensions - Once in the retirement phase, super can be converted into an account-based pension, generally providing tax-free income for those over 60, subject to the transfer balance cap (the limit on how much can be moved into a tax-free retirement phase account). Income layering - Combining a base level of reliable income (e.g. from an account-based pension and any Age Pension entitlement) with a growth-oriented investment portfolio outside super to fund longer-term needs and lifestyle goals. Sequencing risk - Large lump sums invested just before or early in retirement are particularly exposed to poor early investment returns. Structuring the drawdown and investment strategy to manage this risk is critical. Longevity and aged care considerations – Any plan should account for potential future aged care costs and the possibility that one partner may need a higher level of income than the other later in life.
PROTECTING ADULT CHILDREN FROM UNNECESSARY FUTURE TAX LIABILITIES
This is an area many Australians overlook until it's too late. Superannuation death benefits paid to non-dependants (which generally includes financially independent adult children) can attract tax of up to 15–17% (including the Medicare levy) on the taxable component of the benefit. For a couple with a combined super balance in the millions, this can translate into a substantial and avoidable tax bill for their children. Testamentary Trusts and well-structured estate planning can reduce future tax exposure for loved ones.
When a significant inheritance is received, it is extremely common to feel overwhelmed by the decisions that need to be made. Many people have no idea what to do with the money. It can create pressure to act quickly, either out of a desire to "put the money to work" or anxiety about holding cash while markets move. Both instincts can lead to costly errors. We help clients like this get a clearer picture, and a plan so they can move into retirement feeling confident.
General Advice Warning: The information provided in this article is general in nature and does not consider your particular investment objectives, financial situation, or insurance needs; we therefore recommend you seek advice tailored to your individual circumstances before making any specific decisions.
Dobbrick Financial G Pty Ltd ABN 57 686 172 109 and Dobbrick Financial Services (Ipswich) ABN 86 100 184 521 and their advisers are authorised representatives of Fortnum Private Wealth Ltd ABN 54 139 889 535 AFSL 357306.
