SMSF Release due to terminal illness

EARLY ACCESS TO SUPERUATION DUE TO TERMINAL MEDICAL CONDITION

SMSF Release due to terminal illnessReceiving a diagnosis cutting your life short is devastating.  Knowing you can put your affairs in order and help your family can be comforting.  Financial stress can be alleviated if you are aware of how you can access your super early and getting the evidence you need to assist with this process is vital.

What is a Terminal Medical Illness?

As you can expect a terminal medical illness is a medical prediction that your illness or injury is not curable and is likely to result in death.  Common terminal illnesses result from advanced cancer, heart disease, dementia and strokes.

How can I Access My Super due to a Terminal Medical Condition?

The Superannuation Regulations and Legislation allow early access to your super if you have a terminal medical condition.  If you have not already met a condition of release, typically turning 65,  and you want access to your super early you must make a formal request to the trustee of your SMSF (despite you being one of the trustees).

The Trustee will consider your request for early access and will want evidence that you are suffering from an illness or injury that is likely to result in death within 24 months from the date of certification.

Evidence Required include:

  • Two registered medical practitioners, together or separately, provide a written statement certifying you suffer from an illness or incurred an injury that is likely to result in your death within 24 months after the statement has been signed.
  • One of the practitioners must be a specialist practising in the area related to your condition.

You can choose to take a lump sum or establish a pension or a combination of the two.  There is no requirement to withdraw any or all your super balance if you don’t require it. 

How does Timing of My Terminal Diagnosis affect my Super?

If you have not met a condition of release your super is restricted, not available to you, until you meet an appropriate condition of release. Therefore, your super is “preserved” until the trustees are satisfied you have provided sufficient evidence to support your terminal diagnosis.  From the date of certification by two medical practitioners,  your super balance becomes “unrestricted non preserved” and is fully available to be withdrawn.  Any additional super benefits accumulated, or contributions made after the certification and before the expiry of the 24 month  period will also be unrestricted and fully accessible by you.

Tax consequences of your payment made from super is impacted by the timing of your terminal medical condition certification. To obtain tax benefits the certification must be at the time of the payment or within 90 days of receiving the payment.

What happens if I don’t Die after 24 Months?

New certification can be provided to extend the timeframe for another 24 months.

If you elected to take a pension at the time of the original certification it will continue as you started the pension when your benefits were not restricted.  The preservation status (restrictions) of a pension is set at the time of establishment and doesn’t change over the life of the pension.

If you did not fully withdraw all of your accumulation benefit prior to the 24 month expiry period, you can continue to draw on the unrestricted non preserved balance which is the balance of your accumulation account at the expiry date of the certification.  However, the tax consequences change (see below).

Earnings or additional contributions after the expiry period will be fully preserved (restricted) unless you obtain new certification.

Can I Rollover my Super to another Fund After Diagnosis?

No.  The Taxation legislation prevents a super benefit from being treated as a roll over into another fund after the trustee is satisfied that a member meets the terminal medical condition of release and it is within the 24 month time frame.  In accordance with superannuation law the super benefit can be transferred to another fund BUT it is treated, for tax purposes, as a tax-free lump sum payment to the member and then treated as a contribution to the new fund.  The usual contribution eligibility and caps will apply.

Tax Implications on Super Payment due to Terminal Medical Illness

The tax implications depend on how the benefit is paid and if the benefit is paid during the certification period of 24 months.

What are the Tax Consequences for me?

Lump Sum Payment

  • Regardless of age if you are accessing this condition of release any lump sum paid to you is tax free.
  • If a lump sum is paid to you prior to being diagnosed with a terminal illness and accessing the terminal medical condition of release you can clawback the tax paid provided the condition was certified within 90 days of the payment being made.
  • Tax is payable on superannuation lump sum payments (SLSP) which are made after the certification period of 24 months has expired. Refer to the note below re: untaxed components.
  • A SLSP made after age 60 is tax free (see below untaxed component).
  • A SLSP made before age 60 (before preservation age) is taxed at 22% (includes medicare) on the taxed component.

n.b different rates of tax apply to the untaxed component but most  people will not have this component but it can form part of the superannuation lump sum components.

Pension Payments

However, if you are taking a pension the payment is subject to the normal rules.

Under 60 and under preservation age (60 as at 1 July 2024) you pay tax as follows:

  • Taxed component – your marginal tax rate plus medicare
  • Untaxed component – your marginal tax rate plus medicare (most people will not have this component)
  • Tax Free component – tax free
  • No tax rebate on the pension is available

Under 60 and over preservation age – tax is paid the same as above except you receive a 15% tax rebate on the taxable component.  However, this has limited application as from the 1st July 2024 anybody born on or after this date will have reached their preservation age anyhow.

Over 60 – no tax is payable on pension payments.

(The above does not include Tax Payable on a Capped Defined Benefit Income Stream)

Insurance Considerations

Some Insurance products can include a benefit in relation to terminal medical conditions which is based on 12 months certification period and not 24 months which is allowed under the Superannuation Regulations.   

Review if insurance premiums are being paid from your benefits.  If you withdraw all your benefits on your terminal diagnosis the insurance policy may be terminated prior to requesting an insurance payout or before it has been processed and possibly voiding the payout. If you only have a death benefit policy you would not want to put that at risk by withdrawing all of your benefits as there would be no super balance to keep up the insurance premiums.

Strategic Considerations

What do you do if you are under 50, working full time and you are struck down with a terminal illness in the prime of your life whilst you still have a large mortgage and children going to private schools?  At 50 you have worked hard and accumulated a million dollars in your super fund and may have taken out life insurance with terminal illness cover in your SMSF or personally outside the fund?

It is vital to obtain advice from your SMSF Accountant or Licensed Financial Adviser as there are many strategies to get the most  benefit for your situation which is very dependent on your personal circumstances.    

Consider the following strategies depending on your circumstances and discussions with your adviser:

  • Retain in accumulation phase – could be beneficial for Centrelink purposes as it is not counted for income or asset testing and all of the accrued benefits at the end of the certification period will shift the benefits to being fully accessible. However, the earnings will be taxed at 15% and consider tax payable on death benefits paid to non-dependants.
  • Insurance – ensure insurance claims are made and proceeds received before all benefits are withdrawn.
  • Lump Sum Withdrawal – Very popular under these circumstances as it can fund the mortgage, medical treatments and repayment of family or business debts. Pre-death payments can be made directly to non-dependants to avoid tax on death benefits.
  • Establish a pension – Can reduce tax in the fund on pension earnings whilst receiving regular income. Reversionary pension can be nominated allowing the pension to flow directly to the spouse on your death.  Consider transfer balance cap (total amount of pension benefits allowed) and maximising the total amount your spouse can keep in concessionally taxed super environment.
  • Lump Sum Withdrawal and recontribution – the underlying tax components can be washed through to maximise the tax free component which will not be taxed when the benefit is paid out to any non-dependants such as adult children. Be careful of contribution caps when recontributing as well as the length of time for this strategy to be effective as time could be limited.

Key Takeaways

  • Early access to super is allowable when accessing the terminal medical condition of release
  • Ensure two medical practitioners certify and sign a written statement that death is likely within 24 months and one must be a specialist
  • Consider insurance
  • Consider strategies to maximise the benefits and minimise tax
  • Tax free lump sum benefit
  • Restrictions on accessing super benefits are removed
  • Cannot rollover to another fund
  • The certification process can be renewed every 24 months

Do you want to learn more about SMSF Release due to Terminal Illness?

Give us a call on 1300 392 544 or get in touch online.

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If you’re interested in learning more about SMSF Release due to Terminal Illness? Please reach out for a confidential quote. Simply submit your details and one of our friendly team will be in touch as soon as possible.

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Do you want to learn more about SMSF Release due to Terminal Illness?

Give us a call on 1300 392 544 or fill in the form above

Contact Us

If you’re interested in learning more about SMSF Release due to Terminal Illness? Please reach out for a confidential quote. Simply submit your details and one of our friendly team will be in touch as soon as possible.

Contact Us

Name(Required)