skip to Main Content
Compensation Payout

What To Do With Your Compensation Payout

A compensation payout usually involves a large, lump sum payment that is made once to someone, to cover personal long term injury or loss. Finding yourself in the situation where you have been paid out a large amount of money all at once, can be overwhelming without the right advice. There’s no hard and fast rule about what you should do with a payout, but the idea of a compensation payout is to help cover the costs of an injury and to support the injured person for the duration of their injury or illness. It is crucial that a strategy be paired with a lump sum like this, in order to make sure the funds last and be put to the right use.

Why Financial Advice is Crucial When You Receive A Compensation Payout

Speaking with your financial advisor once you have received a compensation payout can make a drastic difference to what you do with your lump sum when you receive it. For example, workers compensation payouts are usually assessable as income when they are paid, to compensate for loss of income. A financial advisor may suggest best methods for channeling your payout, such as using a pension that is exempt from tax. This makes sure that ongoing funds are available to the personal injury claimant, which may be necessary down the track to cover ongoing healthcare costs. When you have received a compensation payout, it is important that you seek financial advice sooner rather than later. Compensation payments usually only occur as a once off payment and there is not a lot of time given for the claimant to assess their options. If a claimant wishes to make the most of certain super benefits without impacting contribution caps and the Transfer Balance Cap (TBC), they will need to take action within 90 days of receiving their payout.

couple with a financial planner

Rules And Opportunities For Investment of Your Compensation

It is a great time to consider extra contributions to your superannuation once you have received a compensation payout. Contributions from a personal injury payout can be made as non concessional contributions or a personal injury contribution, which can save you up to 47% on tax. Tax can also be avoided by making income stream payments, which can also be made as a large lump sum withdrawal. The other good news about personal injury contributions to super, is when they are transferred as Non-Concessional Contributions, they will not add to the claimants Transfer Balance Cap, which caps your Retirement Phase Super to $1.6 million. Even after this cap is reached, the personal injury payout can be used for pension on top of that amount. It is important to speak to your advisor to see if you can qualify for this. There is a work test for super contributions, which is from age 67-74 and is based on 40 hours of gainful employment during a 30 consecutive day period (this may also include periods of authorised leave, paid or unpaid). However, contributions cannot be made if a person in this age bracket has finished their period of employment and is receiving workers compensation payments, without meeting the work test at any time in the financial year.


Make Estate Planning Part Of The Strategy

Many people who receive a compensation payout may also be in the situation where they have decent assets, but lack capacity they had previously, and perhaps have been given a lower life expectancy too. Speaking to a financial advisor who specialises in Estate Planning can walk you through important steps and decisions that will influence the lives of the people you care about the most. Some of these steps might be to update your will, decide on your eligible beneficiaries, Power of Attorney, as well as give an Advance Care Directive for your future care.

Couple with parents

Check Your Income Protection Insurance

An income protection policy benefit may be decreased by the amount of workers compensation payments that are paid out, so it is crucial that the policy definition is looked at. You can have both workers compensation and income protection at the same time. However, income protection is intended to assist you in covering your loss of income, but if workers compensation is already looking after your income loss, this will be weighed up and usually your Income Protection benefit will be reduced as a result.

Receiving a compensation payout may come at an already difficult and overwhelming time. However, it can provide you with a great opportunity to build a tailored strategy to put those funds to use, for significant costs that may come your way as a result of injury that you have experienced. It can also provide you with an opportunity to invest for your future retirement so that you can relax when you think about the days ahead. Speaking to a financial planner will allow you to feel confident in the future, no matter what comes your way.

For expert financial advice from an award winning team get in contact with Elliot Watson Financial Planning 02 4038 1623.

The information within, including tax, does not consider your personal circumstances and is general advice only. It has been prepared without taking into account any of your individual objectives, financial solutions or needs. Before acting on this information you should consider its appropriateness, having regard to your own objectives, financial situation and needs. You should read the relevant Product Disclosure Statements and seek personal advice from a qualified financial adviser. The views expressed in this publication are solely those of the author; they are not reflective or indicative of licensee’s position and are not to be attributed to the licensee. They cannot be reproduced in any form without the express written consent of the author. Elliot Watson Financial Planning Pty Ltd and its advisers are Authorised Representatives of RI Advice Group Pty Ltd, ABN 23 001 774 125 AFSL 238429.

Jose Hernandez

Jose Hernandez*

Jose Hernandez is a financial adviser. He believes that financial planning is the strong foundation on which Australians can build their future. Get in contact with Jose to discuss your financial goals 02 40381623.

Back To Top