Should I Withdraw any Superannuation with my TPD Payout?

Should I Withdraw any Superannuation with my TPD Payout?

If you have been successful with your application for Total and Permanent Disability (TPD) through your superannuation fund, and expect to receive your payout soon, you may have the option to withdraw additional funds from your super account.

 When you are approved for TPD, you are entitled to withdraw the full amount of your superannuation balance. This includes your TPD benefit amount which is usually paid into your superannuation account. This means that once your TPD claim is approved, the balance of your superannuation account will be comprised of:

1. Accrued Super - This is superannuation which has been paid to you by your employer which has grown in value overtime; and
2. TPD Benefit - This is the amount paid to you on approval of your TPD claim.  The value of the benefit will depend on the insurance coverage held in your superannuation account.  You can find out how much you are insured for on your most recent annual statement from your superfund.   

There are a few things to consider before you make the decision to withdraw additional funds from your superannuation account.

For those that have not yet reached preservation age (which is 60 years of age – if you were born on or after the 1/7/1964) the decision to withdraw any money from super should not be taken lightly.  

Options available upon Approval of your TPD Claim

 There are a number of options available to you once your TPD claim is approved. You can:

1. Leave the money in super
2. Make a partial withdraw
3. Withdraw the full amount of your super
4. Move super to a different fund
5. Elect to have regular income payments from your super

There is no single correct option when it comes to payment of a TPD benefit.  It is important to decide which option works best for you.

In our experience, from assisting clients with TPD claims for many years, it is usually the case that most TPD clients will make an initial withdrawal (option 2) and use the money to cover any immediate expenses (including living expenses, loan repayments, medical bills and legal fees in relation to their TPD claim).

Before doing this however, it is important to understand the financial consequences of making a withdrawal from your Super. 

Information to Consider when Withdrawing from your Super Fund:

Tax Implications

 A TPD benefit paid into your superannuation account is not considered taxable income.  However, tax will become payable when money is withdrawn from super prior to preservation/retirement age (60 years of age - if you were born on or after the 1/7/1964).

 If you are 60 years old, you can make withdrawals from your superannuation tax-free.

 If you are under 60 years old and you choose to withdraw your TPD benefit as a lump sum, you will be required to pay tax on this amount, subject to superannuation tax rules and taxation rates. The tax rate applicable to a withdrawal varies and depends on a number of factors including your age. 

 If you are flexible in how you can access your TPD payout and super, you may be able to reduce or eliminate your tax liability.

Centrelink Eligibility

A TPD payout that is paid to your super fund (ie. the payment is made ‘inside’ your super) does not affect your Centrelink payments. However, withdrawing it can trigger income and asset tests. 

For Centrelink allowances including JobSeeker, a Disability Support Pension, the withdrawal of TPD benefits/superannuation funds does not itself affect Centrelink means testing. Rather, the impact of withdrawing funds from your super depends on how those funds are used after withdrawal.

For example:

If the funds are spent on living expenses or applied towards debts, medical costs, or legal fees, there may be little or no effect on the person’s Centrelink entitlements. However, any remaining funds left in a bank account after payment of these things, would be treated by Centrelink as a financial asset. This means the amount of money left in the bank account may be included and assessed under Centrelink’s income and assets tests - which could reduce your ongoing benefits or allowances.

This is something to consider carefully, particularly if you are dependent on Centrelink benefits as your primary source of income.

Account Fees on your Super Account

If you decide to leave money in your superannuation account, it is important to note that you will continue to pay fees on your account regardless of whether you are contributing to your super or not.

These fees can eat away at your super balance over time. This is particularly relevant if your super balance is under $100,000.00, as money made from investments in your super is likely to be reduced or absorbed by account fees in the absence of any further ongoing contributions.

 The Effect of Withdrawal on other Insurances that exist in your Super

It is important to consider the effect that withdrawing funds from super will have upon any remaining insurance you have within your superannuation fund. While you will no longer have TPD insurance (because it has been approved and paid out) you may have other insurance (eg. life insurance) which continues, which you may want to retain.

If you withdraw all your money out of your super, your account will close, which means you will lose other insurances you may have had as part of your super.

Financial Advice

We recommend you obtain advice about what to do in this situation from your accountant,  financial advisor, or your super fund if they have an advisory service

While your solicitor can point out there are things to be considered when withdrawing funds from your super, solicitors cannot provide clients with financial advice.

We always recommend that our TPD clients obtain independent financial advice with respect to the options available upon receiving a TPD claim approval. The purpose of this article is to highlight some of things that should be consider so people can make best decisions for their financial future.