Make sure that you consider all options with Permanent Impairment (PI) Compensation offers!
When you receive an offer for Permanent Impairment Compensation (PI) from the DVA, it is very important that you carefully consider all options before deciding what to do.
There is no “one size fits all” answer for PI offers. Here are some examples of case studies where we had opposing recommendations.
Case Study 1 – Brian who is medically retired (age 45)
Single individual Brian* who considers himself to be a conservative investor, is medically retired on an MSBS Class A Invalidity Pension and is also in receipt of top up Incapacity Payments.
Brian has been offered a Permanent Impairment (PI) Compensation offer and needs to decide on whether to take a full pension, full lump sum, or a combination of the two.
In Brian’s personal situation he owns his own home with no debt, is in receipt of MSBS Class A to which the Douglas Decision has been applied along with top up Incapacity Payments.
When we discussed investment options for any lump sum, we considered using superannuation, managed funds held directly, buying an investment property, and cash.
Given Brian’s Risk profile his preference was to use cash only as the other assets made him nervous.
We established the Internal Rate of Return (IRR) for the Permanent Impairment (PI) Pension option and compared this to the only relevant lump sum option of cash and the IRR was more beneficial to Brian than the lump sum option.
Subsequently, we recommend that Brian accept the Permanent Impairment (PI) Compensation offer as a weekly pension.
Case Study 2 - Leonie who is medically retired (age 62)
Married Veteran Leonie* was medically discharged aged 57 and is currently in receipt of a MSBS Class A Invalidity Pension along with top up incapacity payments scheduled to cease at age 67.
Leonie is married and her partner, age 63, is in receipt of an Industry Super fund account based pension (ABP).
Leonie used her MSBS Member and Ancillary benefits to open a top up Industry Super fund account based pension (ABP).
Both Leonie and her partner have previously used the Non-Concessional Contribution bring forward rule to top up their respective Industry Fund account based pensions and are unable to add additional funds for three more years.
In prior advice, we had dealt with the Death Benefits Tax issue to ensure that the full balance of there ABP’s is now tax free so when it goes to there Non Dependant children it will be tax free instead of being taxed at 17%.
When we discussed investment options for any lump sum, we considered using superannuation, managed funds held directly, buying an investment property, and cash.
For Leonie, superannuation is not an option for three more years. Managed funds did not appeal to them as they would need to establish an ongoing adviser relationship that added costs, given their age, Investment Properties did not appeal and them. Both of these options may also have tax consequences given Leonie has a taxable income from her MSBS and Incapacity Payments.
The internal rate of return (IRR) from the pension option was similar to their targeted super rate of return.
Our recommendation in this case was to take the Permanent Impairment (PI) Compensation offer as a weekly pension and to then reduce there ABP withdrawals by the same amount.
This effectively meant that even though we were not able to put any lumps sums into super, we were able to retain more funds in the tax free super environment that can be left to the children without any death benefits tax.
Case Study 3 - Richard who is medically retired (age 38)
Richard* is married to Kate*, and they have two young children. Richard is medically retired on an MSBS Class A Invalidity Pension and in receipt of top up Incapacity Payments.
Given Richards medical discharge and the fact that they have two young kids, his partner does not work permanently and has some casual work when it works for the family dynamic.
Richard and Kate have a family home on which they have a mortgage which is part of the DHOAS scheme. With the increase in interest rates recently, Richard and Kate are finding it difficult to manage the cost of a family with the increasing cost of paying for their home.
Richard has been offered a Permanent Impairment (PI) Compensation offer and needs to decide on whether to take a full pension, full lump sum, or a combination of the two.
When we discussed options for any lump sum, we considered firstly paying out the mortgage, using superannuation, managed funds held directly, buying an investment property, and cash.
Superannuation is not practical given Richard is 38.
Managed funds did not appeal to them as they would need to establish an ongoing adviser relationship that added costs to the investment.
Buying an investment property would increase their debt and in this current environment that did not appeal.
Given the current family life stage of Richard and Kate we recommended taking the lump sum and placing into an offset account on their mortgage.
We established the Internal Rate of Return (IRR) for the Permanent Impairment (PI) Pension option and compared this to the interest that are currently paying on their mortgage with the lump sum option being more favourable.
This removed the interest cost and allowed accessibility to lump sums if required down the track.
Given their current family life stage, once the kids were older, they felt this option gave them the greatest flexibility to consider different investments as the opportunity arose.
* Names have been changed.
Cameron Teague from CTWealth is a Certified Financial Planner who is part of the ADF Financial Advice Referral Program.
We are committed to providing genuine non conflicted Personal Financial Advice that is billed directly to the DVA to help ADF members and their families make the required decisions when a DVA offer of Permanent Impairment (PI) compensation has been received.
We offer a complimentary and obligation-free 10 minute phone discussion to explore likely advice needs prior to committing to an initial appointment.
Information discussed will be general advice only.
