Superannuation Options for the Terminally Ill
Being diagnosed with a terminal illness is an incredibly challenging time, but understanding your superannuation options can provide financial clarity and support. This guide explores the conditions under which super can be accessed early, the available payment options, and their strategic considerations.
Early Access Through Terminal Medical Condition
A terminally ill individual may be eligible to access their superannuation under the Terminal Medical Condition of Release. Key criteria include:
Certification by two registered medical practitioners (one of whom must be a specialist) confirming the individual has a condition likely to result in death within 24 months.
Certificates must be provided to the super fund trustee within the certification period.
Tax Implications:
Lump sums withdrawn under this condition are tax-free, regardless of the individual’s age.
Pensions commenced under this condition may not attract additional tax concessions, unlike typical retirement income streams.
Important Note: The certification period governs the timeframe for accessing tax-free benefits. Any benefits accrued after the period ends may be subject to standard preservation rules.
Strategic Considerations for Terminally Ill Clients
Payment Options:
Lump Sum Withdrawals:
Pros:
Immediate access to tax-free funds for medical expenses, debt repayments, or personal goals (e.g., family holidays).
Eliminates death benefit tax for non-dependent beneficiaries.
Cons:
Removed funds may be included in social security means testing.
Investments outside super may attract higher tax rates.
Income Streams:
Pros:
Provides regular income for ongoing expenses.
Allows for reversionary pension benefits to eligible dependants.
Cons:
Subject to the transfer balance cap.
Pension income may impact social security entitlements.
Retain in Accumulation:
Pros:
Funds remain within the tax-effective super environment.
Maximizes social security entitlements while below Age Pension age.
Cons:
Earnings taxed at up to 15%.
Death benefits paid to non-dependants may incur tax.
Insurance Proceeds:
Terminally ill clients with life insurance within super should sequence claims carefully to avoid lapsing coverage.
Claiming both Total and Permanent Disability (TPD) and terminal illness benefits may be possible if structured appropriately.
Social Security Impact:
Super left in accumulation phase is not assessable for means testing while under Age Pension age.
Withdrawn amounts spent immediately are not income-tested but may reduce entitlements if reinvested.
Estate Planning Considerations
Beneficiary Nominations:
Review and update nominations to align with wishes and avoid delays in benefit distribution.
Consider binding nominations for certainty in trustee decisions.
Death Benefit Planning:
Tax-free lump sums to dependants are advantageous compared to taxable distributions to non-dependants.
Where death benefits will be paid to non-dependants, withdrawing and gifting funds before death may reduce tax.
Testamentary Trusts:
Direct benefits to the estate to establish trusts for minor beneficiaries, offering tax efficiency and asset protection.
Case Study: Claudia’s Tax-Saving Strategy
Claudia, aged 58, was diagnosed with a terminal illness and had $500,000 in super, fully taxable. She withdrew her super under the terminal medical condition, ensuring it was tax-free. She used the funds to:
Pay for medical treatments and family experiences.
Gift funds to her adult son, Dennis, avoiding the 15% tax he would have paid on her death benefit.
Result: Claudia’s proactive approach saved her estate $75,000 in taxes and reduced potential family disputes.
