Your clients may be interested in taking the lump sum option; however, the tax payable may be substantial.
An Income account (account-based pension) paid from a client’s super fund is particularly tax-effective in cases of TPD due to the tax-free earnings within the fund and tax concessions on pension payments. A client receiving a disability super income stream before reaching preservation age receives a 15 per cent tax offset on the taxable component of each pension payment. The tax-free component is tax-free. From preservation age, the account-based pension is taxed normally.
If an account-based pension is commenced from the super fund that received the TPD insurance, a common misconception is that the trustee would not increase the tax-free component using the disability super benefit formula, and that a rollover to another Trustee is required to qualify.
While some funds may not apply the tax uplift, Sunsuper does so automatically when moving to a pension so there is no need to rollout to get that benefit.