By Colin Lewis, Head of Strategic Advice, Fitzpatricks Advice Partners
November 2025
If you suffer a debilitating illness or injury that impacts your ability to work, you could look to your super fund for financial support.
Most public offer and company super funds offer income protection insurance – salary continuance cover – designed to replace part of your income if you become ill or injured and can’t work.
Salary continuance payments commence after a waiting period, e.g. 30, 60, or 90 days, has been served and the insurer has approved your claim. Typically, benefits are then paid monthly and backdated to the end of the waiting period.
But if you’re ill or injured to the extent that you can’t work in any job ever again, a total and permanent disability (TPD) benefit from your fund can provide financial help in paying medical and rehabilitation costs, debt repayments and supporting the future cost of living for you and your family.
Accessing your super under TPD can be daunting, so here’s a methodical approach to it.
Meet Wilma
Wilma, aged 50, is unable to work due to an accident that’s left her permanently disabled.
She started with Slate Rock and Gravel (SRG) at age 35.
In the SRG Super Fund, Wilma has a balance of $200,000 (SRG contributions with earnings) and $800,000 TPD insurance cover.
Wilma needs her super, so she makes a TPD claim with the trustee.
- Insurance
Most super funds offer TPD cover.
Payouts are determined by the fund’s insurance policy with TPD insurance paying a lump sum if you become totally and permanently disabled because of illness or injury.
Each insurer has a different definition of what it means to be totally and permanently disabled, but in super it covers you where you’re unable to ever work again in any job suited to your education, training or experience, i.e. “any” occupation.
This cover is less likely to pay out than an “own” occupation policy – where you’re unable to work again in the job you were working in before your disability.
Super funds will only have “own” occupation definition policies where they were in place before 1 July 2014.
Wilma’s TPD claim is approved by the insurer, so insurance proceeds are paid into the SRG Super Fund, increasing her balance to $1 million.
- Can Wilma access her super?
Superannuation law restricts super fund members from accessing their benefits – they must meet a “condition of release” before being able to take their benefits.
In Wilma’s case, it’s the permanent incapacity condition of release that must be satisfied before she can access her super.
Wilma’s benefits may be cashed where she’s ceased working and the trustee is satisfied that she’s unlikely, because of ill health, to engage in gainful employment that she’s reasonably qualified for by education, training or experience.
This definition is consistent with “any” occupation insurance cover, so where a fund holds “own” occupation cover under an old policy, insurance proceeds may be locked in super.
The trustee is satisfied that Wilma meets the permanent incapacity condition of release, so her $1 million benefit may be cashed in full or part as a lump sum or used to commence a pension.
- Does Wilma’s payout receive preferential tax treatment?
Taxation law determines the tax treatment of super benefits.
From age 60, all benefits – lump sums and pensions – from taxed super funds are tax-free.
Under 60, benefits are taxable but only the “taxable component”; the “tax-free component” is tax-free – your super fund can advise the breakdown of your benefit between taxable and tax-free.
Where benefits are taken as a lump sum, the taxable component (taxed element) is taxed at a maximum rate of 22 per cent including Medicare levy.
With a pension, that component of each payment is taxed at marginal rates.
For Wilma’s benefits to receive concessional tax treatment, they must meet the definition of being a “disability superannuation benefit” under tax law.
That’s a benefit to Wilma provided she’s suffering from ill-health (physical or mental) where two legally qualified medical practitioners have certified that, due to ill-health, it is unlikely she can ever work in a job she’s reasonably qualified for.
If Wilma meets this definition, a lump sum benefit will get an uplift in the tax-free component, and a pension will receive a 15 per cent tax offset on the taxable component of her payments.
The additional tax-free component represents future service forgone between her date of disablement (date unable to work) and age 65, and is calculated only upon crystallisation of the benefit, i.e. on payment of a lump sum benefit or rollover to another fund.
The tax-free uplift is not available where the benefit is paid as a pension.
However, Wilma may rollover her benefits to another super fund to commence a pension, thereby getting “the best of both worlds” – the tax-free uplift and 15 per cent tax offset on taxable pension payments.
The new fund will receive her benefits non-preserved with the tax-free uplift – the trustee of the SRG Super Fund having determined that Wilma met the permanent incapacity condition of release, and the benefit was a disability super benefit.
But the new trustee will need to make its own determination in treating any benefit it pays as a disability super benefit – it cannot rely on what the former trustee did.
So, Wilma will need to establish this with any new fund she may rollover to.
The two medical certificates given to the SRG Super Fund may be used provided they’re not too old `as the new trustee will apply a ‘use by date’, i.e. new medical certificates may be required if more than two or three years old.
Wilma wants a pension and has found a better fund to provide this, so she rolls her benefits over to the Bedrock Super Fund.
The SRG Super Fund treats the rollover as a disability super benefit, so it gets a $500,000 ($1 million x 15 years future service forgone / 30 years total service period) uplift in the tax-free component – before the rollover, it was nil.
In the Bedrock Super Fund, Wilma commences a pension drawing $80,000 with a taxable component of $40,000 ($80,000 x $500,000 / $1 million). The pension qualifies as a disability super benefit, so the 15 per cent tax offset wipes out the tax and only Medicare levy of $800 is payable.
If Wilma had taken this pension from the SRG Super Fund, the entire $80,000 would have been taxable with tax and Medicare levy being $4,388 (after 15 per cent tax offset).
If Wilma had an SMSF, the process would be no different but as trustee, she would need to be extra diligent and as bona fide as possible given she’s making decisions in respect to her own circumstances.
