Imagine what you would do if you suddenly received a large lump sum of money.…
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.
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.
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.
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