Supporting Clients with Permanent Incapacity: A Comprehensive Guide
Providing financial advice to clients who are permanently incapacitated is a challenging but vital aspect of financial planning. Ensuring financial security, meeting cash flow needs, and addressing tax, social security, and estate planning issues are essential considerations. This guide outlines key strategies for assisting clients in such circumstances.
Key Challenges for Clients with Permanent Incapacity
Clients experiencing permanent incapacity often face increased expenses and reduced income. Common one-off and ongoing costs include:
Mortgage and Debt Repayments: Keeping up with these payments can be daunting. Medical and Rehabilitation Costs: Ongoing treatments can be expensive. Paid Caregiving Services: Professional care may be necessary. Home or Vehicle Modifications: Adjustments to living spaces or vehicles might be required. Education Expenses for Dependents: Ensuring children's education is covered. General Living Expenses: Daily costs can add up. Long-Term Wealth Management: Planning for the future remains crucial.
Potential Sources of Cash Flow
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Superannuation Access: Clients meeting the permanent incapacity PI condition of release can access their super, including proceeds from super-owned insurance policies. Tax concessions are available for PI-related withdrawals.
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Insurance Proceeds: Policies like Total and Permanent Disability TPD or Income Protection can provide tax-free or taxable benefits, depending on the type.
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Social Security Benefits: Eligible clients may receive the Disability Support Pension DSP, Age Pension if aged 67 or older, or concession cards. Carers may qualify for Carer Payment and Carer Allowance.
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Employment Termination Payments ETPs: Lump sum payments for unused leave or severance packages can meet expenses or be reinvested into super for tax efficiency.
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National Disability Insurance Scheme NDIS: Provides funds for support services, including home and vehicle modifications, medical care, and promoting independence.
Accessing Superannuation Under the PI Condition of Release
To access super benefits under the PI condition of release, clients must:
Provide certification from two medical practitioners one specialist stating they are unlikely to engage in gainful employment due to ill health. Satisfy trustee requirements for certification.
Once approved, benefits become unrestricted nonpreserved UNP and can be accessed through lump sums or pensions. It's important to consider the tax implications of accessing benefits before age 60 versus after, as well as the impact on life and TPD insurance policies.
Payment Options
Lump Sum Withdrawals: Useful for immediate expenses like medical bills or debt repayment. Taxable components are taxed based on the clients age, with tax-free uplifts applying.
Disability AccountBased Pension: Provides regular, tax-effective income. Investment earnings supporting the pension are tax-free, and payments receive a tax offset for clients under age 60.
Retaining Benefits in Super: Ideal for clients seeking tax efficiency and social security benefits. Earnings in the accumulation phase are taxed at up to 15, with tax concessions for PI benefits.
Estate Planning and Social Security Considerations
Estate Planning: Review beneficiary nominations to align with estate goals. Consider re-contribution strategies to increase tax-free components. Establish wills and enduring powers of attorney to manage incapacitation.
Social Security Implications: Super in accumulation is exempt from the assets test until age 65. Lump sums used for immediate expenses are excluded from social security income tests. Retain funds strategically in accumulation or income streams to maximise entitlements.
