Successful TPD Claims
If you have had a successful TPD claim there can be a range of financial implications that are worth understanding before you take any action.
This article aims to help you understand the different types of Total & Permanent Disability (TPD) insurance claims and the different financial implications following a successful TPD claim.
The first important distinction is that there are TWO main types of TPD insurance:
- Superannuation TPD – this can either be held within a superannuation account, or “linked” to a super account.
- Stand-alone “non-superannuation” TPD cover. If you think this is the case, check the “owner” of the TPD cover, if this is you, then it should be non-super, if the owner is a “superfund trustee” then it is likely super-linked TPD cover.
If your TPD insurance is “non-superannuation”, then the full proceeds of the TPD claim to the beneficiary should be fully tax free (in most cases).
If the TPD insurance was held through a superannuation account, or linked to a superannuation account, it gets more complicated. Below are the 5 important factors we considering what to do next after a successful TPD claim.
Disclaimer: please understand that this article does not constitute financial advice, please do not make any decisions based on the information in this article. Please seek financial advice before making any decision on what to do with your circumstances, you can click the contact us button below if you’d like further information on TPD claims or any other financial questions you may have.
1. Super versus non-superannuation TPD
As explained above, the first important step is to be fully aware of what type of total and permanent disability (TPD) insurance you have. In most cases this is obvious, if your TPD was held inside your superannuation account, then when the TPD insurance claim is approved, the TPD insured amount will be paid into your superannuation account first, you can then withdraw this full balance, and you can withdraw any existing superannuation money you had. However, if you do this there will be tax consequences, and potentially many other financial consequences. See below for more information on this.
However, if you have TPD insurance directly, and it is standalone cover, then this could either be owned directly by you, or it could be owned by a superannuation fund. If the “owner” of the policy is the same as the beneficiary (ie you), then the full TPD claim amount should be tax-free. If the TPD policy “owner” is a superannuation fund, then there will be significant tax consequences, see point 2 below for this.
As explained above, if your TPD claim his held through your superannuation account, and if you are under age 60, then there will be tax to pay to access these funds, the reason for this is you are making a withdrawal from superannuation prior to retirement age. When withdrawing superannuation funds before retirement age (which is between age 55 and 60) then there is a standard tax rate of 22%, however, after a TPD claim there is a special formula that is applied (the tax-free uplift calculation) to reduce this tax rate, meaning the rate of tax is different for everyone.
In fact, if someone had multiple TPD claims and super accounts, they could have very different tax rates on each one.
And see our free tax calculator here to work out your tax rate: https://www.tpdclaimsadvice.com.au/tpd-tax-calculator/.
This is the link to the ATO rules explaining how the tax works, see the information under the heading “Paying a disability super benefit”: https://www.ato.gov.au/Super/APRA-regulated-funds/Paying-benefits/Calculating-components-of-a-super-benefit/.
3. Do NOT consolidate your super accounts
For many Australians consolidating their super accounts may make a lot of sense, however, this can be very costly for TPD claimants. Not only could they lose TPD or other insurance cover, BUT, they may end up paying more tax when they access their money after a successful TPD claim.
If you refer to the Tax information above, consolidating super accounts means your “eligible service date” could become earlier which means a higher tax rate on withdrawal.
And be careful, because a couple of years ago the government introduced rules to automatically consolidate super accounts, which again unfortunately can increase the tax payable.
4. Centrelink & Other implications
If a person is accessing superannuation TPD benefits, there are a range of other potential implications. A big one is Centrelink, if the person is receiving Centrelink payments, the TPD proceeds are initially held in superannuation so are shielded from any Centrelink impacts. However, when they go to access these funds, there can be impacts to their Centrelink payments. Have a look at the video below for more information on this.
And it’s not just Centrelink payments that may be impacted by superannuation TPD withdrawals, there are various other considerations to keep in mind, which include (but are not limited to):
- Family tax benefits
- Child care rebates
- Medicare Levy surcharge
- Child support payments
- ATO debts, HECS/HELP debts
- Government housing
- Divorce and financial settlements
5. You have choices
Following a successful TPD claim, you have choice. You can make a full withdrawal of your super and TPD proceeds, or you can make a partial withdrawal and leave a balance in super.
There can be significant benefit of leaving money in super which can be tax savings, Centrelink benefits, or eliminating other implications as outlined above. There are also some unique financial strategies that can be applied to maximise your benefit and improve your financial situation. However, leaving TPD proceeds has some important considerations which you should be aware of, such as how are the funds invested, will you retain access in future, will you continue to receive the TPD tax concessions, etc. We’ll write an article on these factors soon.
If you have any questions or feedback on any of this information we would love to hear from you.