In March this year I wrote about one of our client’s good experience with a personal insurance claim. To quickly recap, in 2013 ‘John’ had a heart attack, followed by triple bypass surgery and needed time off work to recover. After learning of John’s condition (and that he may never be able to return to his manual labour occupation), we methodically claimed on each of his existing trauma, income protection and TPD (total and permanent disability) policies. All up, John received $307,994 in lump sum benefits, plus $2,576 per month over a two year period. The full article of his claim can be found here.
John’s two year income protection benefit within super has recently ceased. This is where I would like to pick the story up to demonstrate how we were able to greatly improve his financial situation. John is now 62 and his wife (let’s call her Mary) is 53. Mary is happy to keep working for another 10 years. After their significant windfall they were looking for a plan of what to do next.
Most of John’s lump sum TPD benefit was paid into his super, meaning he could not access it straight away. Given John’s age and inability to work again, we recommended he declare retirement so that his entire super balance could be withdrawn tax-free. Like many people, they had a mortgage that they wanted to clear before they retired. This was paid out, saving them over $11,200 per year in repayments. Funds were also set aside to make some minor improvements around the home, purchase a new car and go on a holiday.
We recommended John contribute the balance of his funds back into super as a non-concessional contribution. In laypersons terms, this means ‘without claiming a tax deduction’. By doing this we were able to reset his taxable components within the super fund from ‘taxable’ to ‘tax free’. This is often overlooked by advisers but will eventually save his adult children 17% in non-dependent beneficiary tax, should he pass away and leave his super to his daughters. Based on his recent account balance, this saving represented almost $62,000 to his estate. I’m sure this is something his daughters would appreciate us taking into consideration!
Once the money was contributed back into super, we commenced an account based pension for John to draw a regular income. The beauty of this strategy is that Mary will continue working, which reduces the amount John needs to draw from his pension account. Mary is even salary sacrificing into her super to help grow her balance over the next 10 years until they are both retired. This gives them peace of mind and flexibility should their situation change over that time.
John will be eligible to receive the Age Pension when he turns 66.5. Under current rules, Mary will be eligible at age 67. This further highlights the need for regular reviews of their situation to ensure he is strategically positioned to maximise his entitlement.