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Practice Note: 29/03/2023

Bankruptcy, Superannuation And Retirement

Business people often utilise superannuation as part of their asset protection strategy. In this Newsletter, we visit the protection that superannuation enjoys and if financial adversity occurs at retirement age, how superannuation can be utilised to protect the person’s essential assets from being lost. We also look at some traps to avoid.

Some risk management benefits of superannuation are:

Savings for retirement are protected

Funds properly accumulated over time and remaining in a regulated superannuation fund are protected if a person becomes bankrupt. This protection applies without regard to the person’s age and is without a dollar limit.

Superannuation savings while bankrupt

During bankruptcy, superannuation monies paid by the employer to the bankrupt person’s superannuation fund are protected. Also, bankrupt persons can save monies from their wages to their superannuation fund provided the superannuation laws enable this. Likewise, any increase in the value of the assets of the superannuation fund during bankruptcy are protected.

Retirement protection

For retired persons who are bankrupt, superannuation lump sum monies properly accessed are protected, without a dollar limit. Assets purchased with these protected lump sum monies are also protected. This may give great latitude for the impact of bankruptcy to be minimised on the person’s retirement. For example, the lump sum monies may be utilised to purchase a car and caravan, or property or enable required assets to be purchased back from the bankrupt estate.

A retirement income stream is also protected. A bankrupt retired person with no dependants can receive a minimum of $66,639.30 after tax before being required to make contributions to the bankrupt estate from his or her income. This income stream can be utilised for living expenses, holidays, and if appropriate, savings in a bank account.

Keeping it in the family – superannuation of deceased spouse

If a bankrupt person’s spouse dies and the bankrupt person properly receives funds directly from the deceased’s superannuation fund, then those funds will be protected for the bankrupt person. Morris v Morris (Bankrupt) (2016) FCA 846.

Some traps to be aware of with superannuation and bankruptcy are:

Lump sums received prior to bankruptcy

Superannuation lump sums received prior to bankruptcy are not protected. Protection only occurs if the person becomes bankrupt before receiving the lump sum.

Income received during bankruptcy

These monies cannot be used to buy assets that are not protected by the Bankruptcy Act. Only lump sum monies received from the super fund can be used for this purpose.

SMSF’s cannot operate while bankrupt

A person cannot operate an SMSF whilst bankrupt. This could prove highly disruptive if the assets of the fund are not readily realisable. While the person is bankrupt the funds will need to be transferred to a complying regulated fund. Bankrupt persons have 6 months from when they become bankrupt to do this. If the assets of the SMSF are not easily realised, it may be worthwhile for the bankrupt person to consider proposing a Part IV Composition to his or her creditors. If creditors accept the Part IV Composition, the bankruptcy is annulled and the SMSF can continue operating.

Death cover for asset protection often flows into a superannuation conversation

Most people we talk to pass comment that it is important to them that their family will be financially OK if they were to unexpectedly pass on. Many have life cover for this purpose. We discussed life cover in last month’s Practice Note which can be accessed here.

Our Recommendation

We recommend clients ask their superannuation advisor what will happen to their super funds if they were to become insolvent and die. Would the super funds be distributed in accordance with their Will, or have they nominated for the superannuation funds to go, for example, to their spouse’s super fund? Further, in that situation, if bankruptcy were to occur, would the super funds be protected for the spouse’s super fund or would the super funds be available to the deceased person’s bankrupt estate?


If you have any questions on Life Assurance and bankruptcy, please call Alan Nicholls on 1300 060 122.

Nicholls & Co

Nicholls & Co are personal insolvency specialists. Personal Insolvency is our sole area of practice. We have been in practice since 1987 and service all States and Territories of Australia.

Should any of your clients have excessive debt and wish to explore how bankruptcy can assist them to resolve their debt and reset for the future, we welcome your enquiry for our independent, creditable advice.

Further Reading

For further information on bankruptcy, we recommend the following articles:


For your questions on bankruptcy and how it can help the insolvent person to reset for the future call 1300 060 122 or email

ABC Radio

Alan Nicholls’ interview on ABC Radio, provides insight into the Nicholls & Co approach when we assist people to get past their severe financial problems. It can be accessed here. Copyright@2023 Nicholls Resources Pty Ltd. All rights reserved. Liability limited by a scheme approved under the Professional Standards Legislation.

This newsletter is provided as general information only and is not advice. All client’s situations are different and independent advice should always be obtained. If you have any questions on bankruptcy, you are welcome to give us a call 1300 060 122 or email