Four unique financial strategies for TPD claimants

19th May 2022

There are unique financial strategies available to Total and Permanent Disability (TPD) insurance claimants that can potentially save tens of thousands of dollars (or more) in tax and reduce or eliminate impacts to other financial benefits.

When a superannuation TPD claim is approved, it is first paid into the claimant’s super account. They can then access these funds (their super plus their TPD proceeds); however, if they are under 60 they will pay tax (all withdrawals after age 60 are tax free). This rate of tax is different for every claimant – it typically ranges from 1% to 20% – and if a person has multiple TPD claims through different super accounts, their tax rate is likely to be different for each claim.

Successful TPD claimants are in a unique position: they have full access to their super and can implement certain retirement strategies that most Australians can’t until they’re 60 or 65. However, their funds can have more complex tax treatment – which can be managed and minimised.

By utilising some of these strategies, TPD claimants may:

  • save significant tax (over $100,000 in some cases);  
  • preserve and/or maximise any Centrelink payments; and
  • maintain a completely flexible position so funds are available whenever needed.

Below are four examples of these unique financial strategies.

Disclaimer: the information below does not constitute financial advice and is general information only, although it may be helpful in assisting your clients.

Strategy 1: Rollover to ‘lock-in’ TPD tax concessions

Some TPD claimants think they have to withdraw their full benefit: they don’t.

The claimant’s full super balance (super plus TPD proceeds) becomes ‘unrestricted, non-preserved’. This never changes. Even if the person went back to work, they would still retain full access to this amount – it’s only future earnings or contributions that may become preserved.

However, the claimant’s full superannuation balance remains in the ‘taxable component’ and the superannuation fund has to calculate the TPD tax-free uplift (while under age 60) for any future withdrawals. The standard practice of superannuation funds is to require the claimant to supply two new updated medical certificates every 12 months to continue to receive the TPD tax concessions. If they can’t provide these, they can still access their super/TPD funds, but they will pay the full 22% tax rate.

If the claimant goes back into any kind of work, it is unlikely that they will receive the tax concessions again.

If the claimant rolls over from their current super fund to a new super fund, the existing fund applies the ‘TPD tax-free uplift’ on rollover and the tax-free amount gets locked into the new super account. This effectively means that any future withdrawals are taxed at the lower rate and the claimant does not need to supply medical certificates again.








Strategy 2: Segregate super accounts

If TPD claimants have more than one super account, they likely have completely different tax rates on each account. This means that for some claimants it might be wise to draw more heavily on the super account/TPD claim with the lower tax rate, preserving or deferring any withdrawals on the higher tax rate super account until they can save tax in future or make withdrawals after age 60 when tax free.

The below example shows a person with two super accounts and very different tax rates:







The claimant may invest the longer term super fund in more growth orientated investments.

Strategy 3: Start a superannuation income stream

When most Australians retire, they turn their superannuation fund(s) into a superannuation income stream account and take a regular payment to fund their retirement.

TPD claimants can do exactly the same thing. However, if they are under 60, they will pay tax on the income that they draw at marginal rates, which totally changes the tax treatment from that of an initial lump sum withdrawal.

Certain TPD claimants, who don't have much other taxable income, or have a high tax-free uplift amount, can draw quite significantly on their super as an income stream and pay little or no tax.

TPD claimants can potentially benefit by rolling over their super fund first (this depends on the super fund they are with or rolling over to) because they can lock in the tax-free uplift on rollover before commencing the income stream … meaning they’ll pay negligible or no tax on the income they draw.

Lastly, perhaps the biggest benefit of starting a superannuation income stream is that all earnings within the super account become tax free. In a normal super account, earnings are taxed at 15%.

Strategy 4: ‘Wash out’ the taxable component

This is a rarer and slightly more complicated strategy – applicable to TPD claimants that plan to use superannuation moving forward and have significant other accessible savings (or another settlement such as a personal injury common law settlement, or a non-super TPD claim, etc).

This strategy involves making a large, after tax (or ‘non-concessional’) contribution to the super fund into which the TPD claim was approved and then rolling it over to another super account. Making this after-tax contribution before the rollover increases the power of the tax-free uplift calculation – which increases the tax-free portion in the new super account.

Some claimants can wash out the tax all together, which means any future withdrawals or income drawn will be tax free.









The ALA would like to thank Andy Reynolds for this contribution.

Andy Reynolds runs an independent financial advice business that specialises in working with personal injury law firms in assisting their clients following common law settlements and insurance claims. Andy has a particular experience in superannuation TPD claims. Andy is a member of the ALA Superannuation and Insurance Special Interest Group. See www.TPDClaimsAdvice.com.au for further information.

The views and opinions expressed in this article are the author's and do not necessarily represent the views and opinions of the Australian Lawyers Alliance (ALA).

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Tags: TPD Superannuation Andrew Reynolds