Q & As of the month

Find out what your peers are asking – based on real-life questions submitted to TechConnect.

Can my client claim on both income protection and TPD?

By Julie Steed, Senior Technical Services Manager

Q: My client has two separate insurance policies with different insurers, which are owned by the same super fund. The client holds the following insurance policies:

° ABC income protection – owned by the super fund
° XYZ total & permanent disability – any occupation - owned by the super fund
° XYZ total & permanent disability – own occupation - owned by the client.

The two XYZ total & permanent disability policies are linked.

In the event of total & permanent disability (TPD), would the client only get the TPD payment due to super laws because they can’t be temporarily disabled and totally disabled at the same time? Does it make any difference that there are two separate policies with different insurers?

A: This is an interesting question which depends on the nature of the products.

There are two aspects – meeting the insurance policy definitions and meeting the super law condition of release.

Some income protection policies determine that you are not entitled to payments if you suffer from TPD. In some instances, members may not apply for TPD until they have applied for income protection. There are other situations where a member may be entitled to the insurance proceeds of both a TPD policy and an income protection policy. You will need to review each policy’s terms and conditions to determine the client’s eligibility, for example there may be off-set clauses.

There may be cases where a policy of insurance is receivable by the super fund however the trustee is unable to make the payment based on a condition of release. This is one of the main reasons for the 1 July 2014 changes which stopped own occupation insurance being held in super.

Under temporary incapacity a non commutable income stream can be paid:

  • for the purpose of continuing (in whole or part) the gain or reward which the member was receiving before the temporary incapacity, and
  • for a period not exceeding the period of incapacity from employment of the kind engaged in immediately before the temporary incapacity (incapacity emphasis added – not defined as temporary incapacity).

The SISR section 6.01(1) definition of temporary incapacity is:

Temporary incapacity, in relation to a member who has ceased to be gainfully employed (including a member who has ceased temporarily to receive any gain or reward under a continuing arrangement for the member to be gainfully employed), means ill health (whether physical or mental) that caused the member to cease to be gainfully employed but does not constitute permanent incapacity.’

If a member is permanently incapacitated as per SISR section 1.03 and SISA section 10(1), but is entitled to receive income protection insurance proceeds, many trustees will pay the income protection, as an income replacement benefit, with pay as you go (PAYG) deducted. However, they will pay it under the permanent incapacity condition of release. This is generally considered to be acting in the best interests of the member. Other trustees construe the definition of temporary incapacity as precluding a member who is permanently incapacitated as receiving a temporary incapacity benefit.

Having established if the proceeds of both policies are payable, you will need to check with the client’s super fund to understand their policies in relation to this issue.

Lump sum or pension as a death benefit – which is best?

By Julie Steed, Senior Technical Services Manager

Q: My client’s spouse died when they were age 53. If my client, who is age 54, commences a death benefit pension and requires more income than they receive from the minimum pension payment amount should they take the additional amount out as a pension or as a lump sum?

A: The pay as you go (PAYG) tax treatment of pension payments depends upon the age of the deceased and/or the age of the death benefit pension recipient as well as the tax components of the pension. This is outlined in the table below:

Deceased and/or beneficiary age 60 or over
Tax-free component Tax free
Taxable component – taxed element Tax free
Both deceased and beneficiary under age 60
Tax-free component Tax free
Taxable component – taxed element Marginal tax rate with 15% tax offset

Please note, a taxable component – untaxed element will generally only arise from a constitutionally protected fund that is taxed differently to most funds.

If the pension has any taxable component your client will generally benefit by drawing amounts in excess of the minimum pension as a lump sum.

The following case study provides an example.

Case study

Belinda dies on her 53rd birthday and has a benefit of $1,000,000 of which $10,000 is the tax-free component.

If Belinda’s husband Bert, age 54, decides to take the death benefit as a pension and draw the minimum annual pension for the financial year 2020/21 of $20,000 (temporary minimum of 2%) his tax components would be as shown in the table below:

ComponentAmountTax treatment
Tax-free component $200 Tax free
Taxable component – taxed element $19,800 Marginal tax rate with 15% tax offset
Total$20,000 

If this was Bert’s only income in the financial year 2020/21, he would not pay any tax on his pension income.

If, however, Bert needed $60,000 for his living costs he could take the additional $40,000 as a lump sum commutation PAYG tax-free.

If Bert took the additional $40,000 as pension payments and this was his only income for the financial year 2020/21, he would pay tax, including the Medicare levy, of approximately $1,941.

More information

If you have any questions, or would like more information, please contact the IOOF TechConnect team on 1300 650 414.

Disclaimer
The information in this section of the website is intended for financial advisers only and is not to be distributed to clients. It has been prepared on behalf of Australian Executor Trustees Limited ABN 84 007 869 794 AFSL 240023, IOOF Investment Management Limited ABN 53 006 695 021 AFSL 230524, IOOF Investment Services Ltd ABN 80 007 350 405, AFSL 230703 and IOOF Ltd ABN 21 087 649 625 AFSL 230522 based on information that is believed to be accurate and reliable at the time of publication.