Every year there are over 90,000 personal insurance claims paid out in Australia, and over 18,000 of these claims are lump sum payments for Total & Permanent Disability (TPD) and most of these are TPD policies held in their superannuation account. And the interesting thing is a large portion of these people didn’t even realise they had personal insurance cover in the first place, and even if they did they didn’t realise they could claim on this insurance cover.
Most people think that they can’t claim on their TPD insurance unless they are severely disabled through an illness or injury and are never able to do any work again, however, it’s not as black and white as that. Many people can claim on their TPD cover even though they may be able to do some other form of work.
If you have a superannuation account that was set up by your employer (you may have multiple accounts), then chances are you have personal insurance cover that you are paying for through your super account. The four main types of personal insurance cover are:
- Death or Life insurance
- Total and permanent disability (TPD) insurance
- Income protection, or salary continuance insurance
- Trauma or critical illness insurance
Death and TPD are usually automatically set up when and employer set up a superannuation account for us, and sometimes income protection will be included. Trauma cover can only be held outside of super.
Superannuation TPD claims
When a person has a superannuation TPD claim approved, the lump sum TPD amount is actually paid into their super account. They then have various options:
- They can withdraw their full super and TPD balance (but will pay tax if under age 60!)
- They can withdraw a portion, and leave some in super
- They can turn some or all of their super into an income stream and take a regular payment
If the person is under age 60 and withdraw a lump sum or start an income stream, they will pay tax. And the rate of tax is different for everyone as there is a special tax formula that the superfund will apply.
And it’s not just the tax, before people access their super TPD monies there are many potential financial considerations and consequences they should be aware of.
Superannuation TPD & Tax
If someone accesses their super before retirement age, (which used to be 55, but is now age 60) the standard tax rate is 22%. However, after a TPD claim the person has access to a tax free portion which reduces there effective tax percentage. This means everybody will have a different tax rate, in fact someone with multiple super accounts & TPD claims can have totally different tax rates on each account.
Furthermore, many super funds miss-calculate the tax on these withdrawals and thousands of Australians will pay too much tax on these claims and never even realise it. One well known industry fund overtaxed every single member with a TPD claim for many years, the average over-taxed amount was around $5,000, but for some people the amount was over $100,000
Centrelink & Other Financial Implications
Many people receiving TPD claims are also receiving Centrelink payments, as they usually haven’t worked for a long time. Centrelink means testing is complicated. While TPD amounts are in superannuation, they are shielded from any means testing until the person turns Age Pension age, which is currently age 67. There are many different types of Centerlink payments and some benefits have very different means testing.
Just making a withdrawal from superannuation before age 60 can also trigger a number of other financial implications, this include: childcare rebates, repayment of HECS or HELP debts, child-support arrangements, Medicare levy surcharge, and many more.
Unique financial strategies
There are various unique financial strategies people can apply after TPD claim to reduce tax and minimise other implications when accessing these funds. Some people are able to actually reduce or eliminate the tax all together by applying certain financial strategies.
If you would like any further information in relation to how you can reduce tax on your claim payout, Please contact Andrew Reynold on 1300 220 698 or via email andrew@efsadvice.com.au , or visit our website https://www.tpdclaimsadvice.com.au