Opinion
Superannuation and TPD Insurance: Four things you should tell every TPD client
11th Oct 2018
- Tax is payable on your TPD benefit.
- Do NOT consolidate any superfunds as this can increase your tax liability.
- Centrelink and other benefits may be affected.
- Super and TPD funds will remain accessible.
On successful approval of a superannuation Total and Permanent Disability (TPD) claim, the claimant will usually need to make an initial withdrawal to pay legal fees and provide for any immediate expenses. However, before they withdraw their entire benefit, they should understand their options and the financial consequences of their decisions.
1. Tax
Tax is not payable when a TPD claim is approved and paid into the claimant’s superannuation account. Tax is payable when the claimant then withdraws their benefit from superannuation prior to their preservation age – currently between ages 57 and 60 depending on their date of birth.
The standard tax rate when withdrawing TPD and superannuation funds before preservation age is 22% (20% plus Medicare levy). However, if a person is making a withdrawal after TPD then a portion of the withdrawal becomes tax-free – this is called a ‘tax-free uplift calculation’. This means that the effective tax rate on withdrawal can vary between less than 1% and over 18%. In fact, a person with multiple TPD claims will have a different tax rate on each one.
All too often people reach the end of the claim process and receive the great news that their insurance claim is successful, only to discover that they will lose a significant portion of their payout to tax. Many TPD claimants can significantly reduce or eliminate their tax liability if they have some flexibility in how they access their TPD and super benefits.
2. Do NOT consolidate superannuation accounts
Lawyers may advise their TPD clients not to roll over any superannuation funds that have insurance components to ensure they don’t lose the ability to claim on any of their insurance cover – however, most people don’t understand that rolling over superannuation funds can also increase the tax payable when accessing their TPD benefit.
An important variable in the ‘tax-free uplift calculation’, as mentioned above, is the superannuation account’s ‘eligible service date’. This date is the EARLIER date of either:
- the date they commenced their superannuation account; or
- the commencement date of any account rolled into their current super account.
The earlier this date is, the higher the tax rate the claimant will pay when they withdraw their benefit.
A recent example was a 48-year-old man who was almost at the end of his TPD claim case; he had a $200,000 TPD benefit held in his superannuation account. His tax payable would have been just under $2,000 (under 1%) on full withdrawal of this benefit. He had another small super account with a balance of roughly $1,500 and no insurance attached to it, which was set up for a job he had just after high school. He decided to roll this amount into his larger super account – unfortunately, this increased his tax payable on withdrawal to over $28,000 (over 14%).
3. Centrelink and other benefits
A successful TPD claim has no impact on a person’s Centrelink or other benefits (such as child support payments), because the TPD claim is initially paid into superannuation which is excluded from Centrelink means testing until a person reaches their Centrelink Age Pension Age, which is between 65.5 and 67.
However, when the claimant then accesses their TPD and/or existing superannuation balance, this may impact their Centrelink entitlements. Different Centrelink benefits have different types of means testing.
With Centrelink pensions and allowances (such as Newstart allowance, Disability Support Pension, carer payments, etc) the actual withdrawal of TPD and/or superannuation amounts does not impact Centrelink means testing – it’s what the claimant does with the funds that may affect these Centrelink benefits. For example, if the withdrawn amount is spent or used to pay debts and legal fees, then there is no impact on their Centrelink payments. Any remaining amount left in the claimant’s bank account is treated as a ‘financial asset’ and Centrelink will include this amount in their ‘income’ and ‘assets’ means testing, potentially reducing the claimant’s Centrelink entitlements.
Centrelink means testing for Family Tax Benefits is different. Eligibility for these benefits is based on the recipient family’s ‘adjusted taxable income’. When a person makes a superannuation withdrawal before age 60 a portion of the withdrawal will be counted as ‘taxable income’, so the TPD and super withdrawal may affect the claimant’s Family Tax Benefit. Similarly, child support assessments are based on adjusted taxable income, and may be impacted by TPD and superannuation withdrawals.
4. Superannuation and TPD funds remain accessible
Having often gone through a long and arduous process to get their TPD claim approved, claimants often want to get their hands on their TPD proceeds immediately. This is due to a fear that if they leave money in super it might be locked up again and they will have to go through another long process to access it, or possibly have to wait until retirement age.
In reality, once a claimant’s TPD claim is approved their existing superannuation balance and TPD claim becomes ‘unrestricted, non-preserved’. This means that the claimant has access to these funds at any time in future and all they need to do is complete a withdrawal form to access further funds. Even if they regain their health and go back to work or roll over their benefit to another super account, they will still have access to these unrestricted, non-preserved superannuation funds. Note that there is a small number of super funds that interpret this rule differently, but there are ways to ensure that funds remain accessible.
TPD insurance claimants have this unique ability to treat their superannuation account like a bank account – receiving the tax, Centrelink and other benefits of having a superannuation account, while retaining the flexibility to withdraw funds when needed.
Summary
Giving TPD insurance claimants specific information early on can stop them taking action that is potentially financially damaging and encourage them to think about how best to maximise their claim should it be successful.
Recently we assisted a TPD claimant who, having had her TPD claim approved, immediately put a deposit on a home. She did not realise that over 12% of her TPD proceeds would be withheld for tax and she now has insufficient funds to settle on her house, which has caused her much stress.
Andrew Reynolds is an ALA member and a Certified Financial Planner. Andrew assists personal injury law firms specialising in the superannuation and insurance area.
The views and opinions expressed in these articles are the authors' and do not necessarily represent the views and opinions of the Australian Lawyers Alliance (ALA).
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