How to manage early retirement due to ill health

Being sick or injured means you may be eligible to claim additional benefits including income protection, total and permanent disability (TPD) or terminal illness insurance, workers’ compensation or the Disability Support Pension.

Getting your claim(s) started as soon as possible can speed up payments and take some financial stress out of your life.

Check with your super fund to find out if you have income protection and TPD cover, and how to submit a claim. Both types of insurance will have a waiting period before payments can begin. The waiting period is commonly 60 or 90 days after you last worked for income protection, and six months is typical for TPD. The assessment process can be long, so submitting a claim before the waiting period has ended is not uncommon. If you also have insurance outside super, get your claims underway there too.

If you have a terminal illness with a prognosis of two years or less, you can claim your super balance and usually any life insurance attached to your account. Claims for terminal illness are processed faster and don’t have a waiting period.

Current statistics from the Australian Securities and Investments Commission (ASIC) show that the average time between a TPD claim being submitted and approved (or declined) is 3.6 months when cover is held in a super fund and 7.5 months for other policies. Income protection claims are usually processed more quickly, with an average claim time of under two months for both super and policies held directly.

If your ill health is work-related, make sure you have reported it to your employer and visited a doctor to document the cause and your capacity. You may then fill out a workers’ compensation claim form.

Use Centrelink’s payment finder to generate a list of government benefits you may be able to claim. The results include links to more information about each of them, including how to apply.

Step 2: Work out your current financial position

Take stock of your current financial situation and establish the income you have, plus any assets that can be sold to support you. This includes your savings, payments from income protection, your partner’s income and any investments such as a rental property, shares or bonds.

Include your superannuation but remember you may not be able to access it immediately, depending on your circumstances.

Step 3: Set a retirement budget

Review your necessary and desirable expenses. That means setting a budget.

Most people find their retirement income needs resemble a lop-sided smile – high in the early years before settling into a regular pattern mid-retirement, then rising again later as you age and your health declines.

Step 4: Consider accessing super

If your income doesn’t meet your needs, it’s time to consider tapping into your super savings.

To cash your super, you usually need to be at least 60, but ill health can change that. Your entire balance is available if you can meet either the permanent incapacity or terminal illness conditions, no matter your age.

Your TPD insurance claim and your fund’s assessment of permanent incapacity are two separate processes, one decided by the insurer, the other by your fund’s trustee. That means you may be able to access some of your super on incapacity grounds even while the insurance claim is still being assessed.

You can generally choose whether to receive your super in the form of lump sum withdrawals, a regular income (pension) or a combination of both. If you’re receiving a terminal illness payment before turning 60, it is only tax-free if you choose a lump sum.

When you’re 60 or more and not planning to go back to work, you can access your savings without meeting any special conditions.

Step 5: Apply for the Age Pension

The qualifying age for Age Pension is 67. If you have not reached the eligible age when you retire, don’t forget to apply just prior to your 67^th birthday, assuming you have assets and income below the means test thresholds. If you are late applying, you will not receive back pay for the period that you were eligible but had not applied.

Step 6: Review your housing options

Consider where you are living and whether your current home is still suitable.

Your home could also help fund your retirement through options like a reverse mortgage or loan. The government offers retirees a form of reverse mortgage through the Home Equity Access Scheme (HEAS) – previously called the Pension Loan Scheme – that may be worth investigating.

The HEAS provides you with regular retirement income payments if you own your home and is available to people aged 67 or more who meet the Australian residence requirements for Age Pension.

Alternatively, you may need to think about downsizing or relocating to another city or state to free up some money to live on or pay out your mortgage if you still have one.

Before downsizing, remember there are costs such as stamp duty involved in selling your home and buying a new one. You also need to consider the potential impact on any Age Pension or government benefit you’re entitled to receive.

If you sell your home and are aged 55 and over, you may be eligible to make a downsizer contribution into your super account.