“I've just been paid a large sum of money from a death cover claim through my super fund and would like some guidance on how to make this money work best for me and my family. I am wondering whether I should put a portion towards my offset mortgage account, a high-interest savings account, or a term deposit."
-Question from Greg in Adelaide, SA
Top answer provided by:
Cathy Greven
Hi Greg,
I am assuming that you have a terminal illness and have been paid out as you have less than say 2 years to live. What a wonderful gift you have given to yourself and your family by having this kind of policy. Taking out this kind of insurance in the unlikely event of death is important but just as important is the fact that you understood the features in this policy that enable you to receive the death benefit (through your super) while still alive and can sort out your financial affairs and see the difference this gift makes on your family. Not all insurances are the same and the devil is in the details.
How best to support you and your family is difficult with limited information but I want to clarify two points first.
-If you could withdraw from super through a condition of release under an assessed and agreed total and permanent disablement application, other than age. you meet such a condition, and if under 60 years of age, then the taxable portion of the funds you withdraw from super will be taxable in your personal return and you receive a tax offset equal to 15% of the payment. You should seek advice on this before proceeding.
-If you withdraw from super and you met a condition of release and you are aged over 60 years and have retired (no longer working or changed employment) you meet a condition of release, and your funds are available to be withdrawn tax free.
The various options you could look at (and again I emphasise getting specific advice on this to best structure your needs from a professional financial planner) you might want to consider:
1. As you have stated, payout the mortgage (use your offset account) to reduce financial burden is a great start.
2. You could withdraw 100% if you wanted to, but then you must consider what to do with the funds (as you have eluded too, put in high interest/term deposit account) which then those earnings are 100% taxable to you and are not really growing but maintaining an interest return.
NOTE: Inflation will eat away at this capital over time.
3. It’s always good to have a cash backup plan (an emergency fund) that you can get access to straight away for the unforeseen (this can be in a high interest account too).
4. You could look at (and depending on which super fund you are with and if it allows for) starting a pension (again over age 60) within your super with the balance (which will be tax free to you) and nominate your partner as a reversionary beneficiary. Upon your death, the pension transfers to your partner (in a tax-free environment) and or they could withdraw lump sums and or keep the pension going.
NOTE: This transfer will add to your partner’s transfer balance cap ($1.9M) so again you need to seek advice thereon.
5. The other option is to look at an annuity (portion thereof) to provide guaranteed income for the life of yourself and your partner (through a reversionary nomination) and depending on your capital and income needs, if Centrelink is applicable, a lifetime Annuity could be sought with some of the funds to compliment your income and provide security and longevity to your funds as well.
The issues of withdrawing it from super means you must invest it somewhere and, in whose name, and that is 100% taxable to that person. If some or most is left in the super environment, the income earnt, and CGT incurred is taxed at 15% while in accumulation and or if converted to a pension account the taxation is ZERO.
To conclude, the information provided is general in nature and not specific to your needs Greg, but I would suggest you seek professional financial advice from a licensed adviser who can look at your entire situation and recommend what will help improve the outcome of this death benefit payment in your super fund for you and your families best interest.
While the Adviser Ratings Website facilitates the question and answer functionality, all such communications are between users and authorised financial advisers, of which Adviser Ratings has no affiliation. Adviser Ratings is not the advice provider and does not provide financial product advice and only provides information that is general in nature.
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