Early release of super due to permanent incapacity

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If you become permanently incapacitated due to physical or mental ill-health, you may be able to access your super even if you are not retired, provided you meet the eligibility conditions.

Normally you can only access your super once you’ve reached your preservation age and met a condition of release (such as retiring from the workforce or turning 65). Your preservation age is between the ages of 55 and 60, depending on your date of birth.

However, these normal conditions of release can be waived due to permanent incapacity.

What is meant by permanent incapacity?

You’re considered permanently incapacitated according to Australian super legislation if two medical practitioners certify that you have physical or mental ill-health issues that are likely to stop you from ever working again in the job you’re qualified to do.

Those qualifications could include your prior experience, training or education.

What permanent incapacity benefits can you potentially access via super?

If you’re permanently incapacitated, you can access:

1. Any total and permanent disability (TPD) insurance benefits that you may have in your super fund, and/or
2. Any other super benefits you have accumulated. There are no restrictions on the amount of your own benefits that you can access, and you can withdraw them as a lump sum or as a regular income stream.

If you have TPD insurance in your super fund, the benefits you can claim will depend on the extent of the cover you have. TPD benefits can be paid either as a lump sum or an income stream, depending on the terms and conditions of your insurance policy.

You may not need to withdraw all (or any) of your other super benefits if you have sufficient TPD insurance.

It’s important to remember that your super is designed to fund your retirement, so early withdrawals will impact the amount you’ll have available later in life. You’ll also lose the power of compound interest on any withdrawn funds. The effect of compounding can be substantial over time.

So TPD insurance cover can be an effective way of preserving your super funds and providing a financial safety net for you and your family.

Other reasons for early release of super

You can find all the ways that you can access your super here, or continue reading for other conditions of release that may intersect with permanent incapacity.

Temporary incapacity

Temporary incapacity is defined as having a physical or mental condition that means you’re unable to work for specific period, or you can only work reduced hours during that time.

If you’re temporarily incapacitated, you’re only entitled to two types of benefits via your super fund:

1. Any income protection insurance benefits that you may have, and/or
2. Any voluntary employer-funded benefits that you may have. This includes super contributions made by your employer that are in excess of the 10% compulsory superannuation guarantee contributions that they are required to make on your behalf.

Compassionate grounds

Accessing super benefits early due to permanent incapacity is different from accessing them on compassionate grounds, which is another potential way that super can be accessed early under Australian law. It’s important to understand the difference between these two categories because there are different terms and conditions for access.

The compassionate grounds provision only applies if you are unable to pay one or more of the following expenses:

• Your own (or a dependant’s) medical treatment or transport for a life-threatening or mental illness, or one that generates chronic pain
• A mortgage or council rates payment to prevent you from losing your home
• Home or vehicle costs to accommodate your own (or a dependant’s) disability
• Paying for your own (or a dependant’s) palliative care
• Paying for the death, funeral or burial expenses of a dependant.

The early super payment you can receive on compassionate grounds is also limited to the amount you need to cover any of these expenses.

In contrast (as mentioned earlier), there are no restrictions on the amount of your own super that you can access early if you become permanently incapacitated.

How do you apply for permanent incapacity benefits via your super?

If you’re permanently incapacitated, you can apply to your super fund to claim any TPD insurance benefits available to you and/or for the early release of any or all of your other accumulated super benefits.

Your application will need to include certificates verifying your permanent incapacity from two medical practitioners, as outlined earlier in this article.

Your super fund (or its associated insurance company) will assess any information you provide in deciding whether to approve any early release of your super funds or a TPD insurance claim.

Do the rules differ if you’re in an SMSF?

No. SMSF trustees are only able to release super funds for permanent incapacity if a member provides the required certificates from two medical practitioners, just like any other super fund. Trustees should also pass any member TPD insurance claims onto their insurance company for assessment and processing.

The Australian Taxation Office (ATO) can impose severe penalties on SMSF trustees for the illegal or unauthorised early release of super funds. These penalties can include very heavy fines of up to $504,000 for individual trustees and jail terms of up to five years, or fines of up to $2.52 million for corporate trustees.

What are the tax implications?

If you are totally and permanently disabled and permanently unable to work, you can access:

• Any TPD insurance payout available to you once the fund receives it, and
• any other super benefits you have in your account.

When you withdraw your TPD insurance and super benefits, the rate of tax you pay will depend on whether:

• You have reached your preservation age
• You receive lump sum or income stream payments
• Your payments have taxable and non-taxable components
• Your fund has already paid tax on any taxable component of your payments (that is, whether that taxable component has taxed or untaxed elements).

If you receive early super income payments for your permanent incapacity and you haven’t reached your preservation age (or if you have but are still aged under 60):

• The taxed element of the taxable component is taxed at your marginal rate, but you’re entitled to a tax offset of 15%.
• The untaxed element of the taxable component is taxed at your marginal rate.

If you receive early super income payments for your permanent incapacity and you’re aged over 60:

• No tax is payable on the taxed element of your taxable component
• The untaxed element of the taxable component is taxed at your marginal rate, but you’re entitled to a tax offset of 10%.

If you receive an early super lump sum payment for your permanent incapacity working out how much tax you are likely to pay also depends on your age and super components. But it’s a little more complex, as you can you can see in the table below.

Type of super	Maximum rate of tax*
Taxable component – taxed element	Under preservation age: 22% including Medicare Levy
	Over preservation age but under 60: No tax up to $225,000 17% on balances over $225,000
	Over 60: tax free
Taxable component – untaxed element	Under preservation age: 32% up to $1.615 million 47% on balances over $1.615 million
	Over preservation age but under 60: 17% up to $225,000 32% on balances between $225,000 and $1.615 million 47% on balances over $1.615 million
	Over 60: 17% up to $1.615 million 47% over $1.615 million

*Tax rates for the 2021-22 financial year, including 2% Medicare Levy

The bottom line

Australian super law allows you to access your super benefits if you’re permanently incapacitated. However, if you have total and permanent disability (TPD) insurance cover in your fund, you may not need to withdraw all (or any) of your super benefits early.

It’s worth seeking independent professional advice about an appropriate level of TPD insurance cover in your super fund for your individual financial circumstances. The information contained in this article is general in nature.