Great question, Joan.

Superannuation offers many opportunities to reduce tax payable on investment earnings during your lifetime, but it can be quite complex, and the estate-planning side of super is particularly so. You are doing to the right thing to plan ahead, as I am sure you do not want your children to end up paying more tax than they need to.

To answer your specific question – you cannot just withdraw the untaxed portion of super funds, any withdrawal is taken pro-rata across all components of the account. So, assuming your children are over 18 and that you do have a taxable portion in your super, all super funds would need to be withdrawn before your death in order for there to be no tax at all potentially levied on the withdrawal.

Superannuation can provide you with significant taxation advantages during your lifetime, but if the funds are inherited by someone other than a “tax-dependent”, then there can be tax payable by your beneficiaries. A tax-dependent includes a spouse or a child under 18, but not an adult child, for example.

If the plan is for all super funds to be withdrawn and distributed amongst adult children after your death, for instance, this tax could be substantial. Whereas, if you yourself were able to withdraw all funds just before you passed away (if you were able to anticipate this somehow!), then there may be no tax payable at all.

Superannuation balances can be split into a tax-free portion and a taxable portion. Furthermore, the taxable portion can be split into a taxed component and an untaxed component. There is no tax payable on the tax-free portion under any scenario. However, tax can be payable on the taxable portion depending when the withdrawal is made (i.e. during your lifetime or after your death) and on who the funds pass to (i.e. to a tax-dependent or not). If tax is payable, then a higher rate is applied to an untaxed taxable component (up to 30%) than to a taxed taxable component (up to 15%).

Another thing to consider is that there can sometimes be advantages in leaving the funds in super after death, for example, taking the funds ongoing as a superannuation income stream.

As you can see, the question as to what to do with superannuation as you age is rather complex. It is generally best to sit down with a financial planner to make sure you understand all the options and the implications for your own situation. Particularly as you get older, there are less and less opportunities to put more money back into super, and so it is important to plan ahead.