Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 155

The vital role of insurance in super for disability care

This is a sad and true story of a young man – let’s call him Mikey – who in July 2015 at the age of 31 suffered devastating injuries whilst participating in the sport he loves, mountain biking. Mikey is now a tetraplegic, meaning his injury affects all four limbs, and with limited neurological recovery expected, he will always have a high dependency for care.

He has been in hospital in the spinal unit for many, many months and soon it will be time to go home. He is lucky to have a loving, caring family and his parents have decided to provide his long-term care in their home. Even his sister has moved back home to help.

Importance of risk insurance

Before his accident, Mikey worked as a roofing contractor, and his Super Guarantee contributions were being made to a retail superannuation fund. Mikey had saved little in his super so far, and had no other savings or assets to speak of. As luck would have it, the fund came with death and Total and Permanent Disability (TPD) cover and Mikey is now entitled to a payment of around $493,000.

Mikey’s father came in to seek financial advice on what to do with this sum. Of course, the family home needs alterations to accommodate Mikey’s care including a new bathroom off his bedroom, but Mum and Dad are choosing to fund these alterations themselves rather than pay for them out of the insurance payment.

They wish to set aside the TPD payout as a long-term investment for Mikey’s benefit in future years. They were in the process of understanding Mikey’s entitlements under the National Disability Insurance Scheme (NDIS) which is rolling out in their area on 1 July 2016. They were keen for Mikey to qualify for the Disability Support Pension (DSP) so that they did not have to draw on the TPD payment for his living expenses.

A financial plan for a person with a disability

What should they do with the $493,000 so that it can be invested for the long term, but accessible if needed without affecting the DSP which of course is means tested? Investing the money in Mikey’s own name means it will be subject to the Income and Assets test and cut into his Government benefits.

A Special Disability Trust (SDT) is a trust established to pay for any disability care, accommodation, medical costs and other needs of the qualifying beneficiary during their lifetime. It comes with social security benefits in that the balance up to $636,750 is exempt from the Assets Test, so it would meet the requirement to maximise Mikey’s DSP.

However, there is one major hurdle. SDTs are specifically intended for succession planning by parents and immediate family members for the current and future care and accommodation needs of a person with a severe disability or medical condition. As such, only immediate family members can contribute to it and Mikey is not able to contribute himself as the beneficiary.

No SDT for Mikey. If in future Mum and Dad wanted to set one up for him and gift their own assets to it, it can be considered down the track.

The solution is actually remarkably simple: keep it in super in the accumulation phase, but roll it to a new fund. The payment from the new fund will be classified as a ‘disability superannuation benefit’. A formula is applied to the payment to calculate a tax-free component, and in this case it will be a significant amount, around $479,000.

The remaining $14,000 is a ‘taxable’ component, taxed at 21.5% if and when he withdraws it from the superannuation system as a lump sum.

For more information on how disability superannuation benefits are taxed refer to the ATO site here.

As Mikey has met the ‘total and permanent incapacity’ condition of release, he can access the money at any time. Lump sums will be withdrawn in proportion to the tax-free and taxable components, and taxed accordingly.

Best of all, as he has left it in accumulation phase (as opposed to starting an income stream), and he is under his age pension age of 70, it is exempt from the Income and Assets test and he qualifies for the full rate Disability Support Pension which is tax-free.

Super is, in fact, a very tax-effective and flexible vehicle to hold money for those who are young and suffer permanent incapacity. There’s no need to go fiddling around with complex trusts. Although it is worth noting that the recent super announcements in the Federal Budget – namely the $500,000 lifetime limit on non-concessional contributions – puts the brakes on being able to contribute large compensation payouts to super.

In Mikey’s case, once he moves home to his parent’s house, they will meet the interdependent relationship definition. This means that they are treated as each other’s dependants for both tax and superannuation purposes. Mikey will do a non-lapsing binding nomination to his parents, and if he predeceases them, the money passes to them tax-free. As he has no other assets, this negates the need for him to do a will.

The ripple effect of this terrible accident runs wide, and has changed the lives in this entire family. Mikey’s Dad needs to cut down his working hours from full time to part time to care for Mikey. He is in a defined benefit super fund, with the end benefit paid being based on a formula relying on a multiple (including part-time adjustments) and Final Average Salary. Cutting down his hours is going to cost him in terms of his own retirement benefit.

But imagine the position Mikey would be in if a) he didn’t have such a loving, supportive family and b) he didn’t have the insurance cover in his super fund. It’s a strong argument for compulsory insurance cover in super for the young.

 

Alex Denham is a Financial Services Consultant and she is also freelance writer. This article is general information and does not consider the personal circumstances of any individual and professional advice should be obtained before taking any action.

RELATED ARTICLES

The insurance essentials

Understanding disability insurance in super

Ensure your children are insured

banner

Most viewed in recent weeks

Unexpected results in our retirement income survey

Who knew? With some surprise results, the Government is on unexpected firm ground in asking people to draw on all their assets in retirement, although the comments show what feisty and informed readers we have.

10 reasons wealthy homeowners shouldn't receive welfare

The RBA Governor says rising house prices are due to "the design of our taxation and social security systems". The OECD says "the prolonged boom in house prices has inflated the wealth of many pensioners without impacting their pension eligibility." What's your view?

Three all-time best tables for every adviser and investor

It's a remarkable statistic. In any year since 1875, if you had invested in the Australian stock index, turned away and come back eight years later, your average return would be 120% with no negative periods.

The looming excess of housing and why prices will fall

Never stand between Australian households and an uncapped government programme with $3 billion in ‘free money’ to build or renovate their homes. But excess supply is coming with an absence of net migration.

Five stocks that have worked well in our portfolios

Picking macro trends is difficult. What may seem logical and compelling one minute may completely change a few months later. There are better rewards from focussing on identifying the best companies at good prices.

Six COVID opportunist stocks prospering in adversity

Some high-quality companies have emerged even stronger since the onset of COVID and are well placed for outperformance. We call these the ‘COVID Opportunists’ as they are now dominating their specific sectors.

Latest Updates

Retirement

10 reasons wealthy homeowners shouldn't receive welfare

The RBA Governor says rising house prices are due to "the design of our taxation and social security systems". The OECD says "the prolonged boom in house prices has inflated the wealth of many pensioners without impacting their pension eligibility." What's your view?

Interviews

Sean Fenton on marching to your own investment tune

Is it more difficult to find stocks to short in a rising market? What impact has central bank dominance had over stock selection? How do you combine income and growth in a portfolio? Where are the opportunities?

Compliance

D’oh! DDO rules turn some funds into a punching bag

The Design and Distribution Obligations (DDO) come into effect in two weeks. They will change the way banks promote products, force some small funds to close to new members and push issues into the listed space.

Shares

Dividends, disruption and star performers in FY21 wrap

Company results in FY21 were generally good with some standout results from those thriving in tough conditions. We highlight the companies that delivered some of the best results and our future  expectations.

Fixed interest

Coles no longer happy with the status quo

It used to be Down, Down for prices but the new status quo is Down Down for emissions. Until now, the realm of ESG has been mainly fund managers as 'responsible investors', but companies are now pushing credentials.

Investment strategies

Seven factors driving growth in Managed Accounts

As Managed Accounts surge through $100 billion for the first time, the line between retail, wholesale and institutional capabilities and portfolios continues to blur. Lower costs help with best interest duties.

Retirement

Reader Survey: home values in age pension asset test

Read our article on the family home in the age pension test, with the RBA Governor putting the onus on social security to address house prices and the OECD calling out wealthy pensioners. What is your view?

Sponsors

Alliances

© 2021 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.